Fed approves another jumbo interest-rate hike, but also signals go-slower strategy

The Federal Reserve on Wednesday approved the fourth straight jumbo increase in its benchmark interest rate, extending a rapid pace of hikes that brings the rate to the highest level in 15 years.

For the first time, the central bank also signaled it would watch closely whether rapidly rising borrowing costs might damage the economy owing to the usual “lag” in how rates slow growth.

The Fed’s somewhat softer language gave a boost to stocks. The Dow Jones Industrial Average
DJIA,
+0.40%

and S&P 500
SPX,
-0.05%

both shot up after the decision was announced.

By a unanimous vote, the Fed hiked its rate by 0.75 percentage points to a range of 3.75% to 4%. 

In new language, the Fed said it expects to continue with further rate hikes “until they are sufficiently restrictive” to return inflation to 2% “over time.”

The Fed also said it will “take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

After the Fed raised rates at the fastest pace in 40 years, some economists have warned the central bank could overdo rate hikes and damage the economy. And the Fed noting that it was watching “financial developments” is a nod to risks the strong dollar is putting on the global economy.

Two months ago, the Fed penciled in a half-point rate hike in December but that could change. Economists say the eventual size of the move will depend on the economic data. There will be two unemployment reports and two consumer price inflation prints before the next Fed policy meeting on Dec. 13-14.

The conventional wisdom is that the Fed will reduce the speed of hikes to a half a percentage point next month and then a final quarter point hike early in 2023.

That would bring the peak Fed funds rate in a range of 4.5%-4.75%. However, inflation has been so strong recently that some economists are now penciling in a higher terminal rate of 5% or higher. 

The latest reading of core consumer inflation reached a high of 6.6% in September, the strongest increase since 1982.

A number of economists are calling for a recession next year.

If there is a recession, economists warn the Fed won’t likely ride the rescue. The central bank has indicated a desire to hold the benchmark rate at a high level to strangle inflation. 

For now the economy is still showing plenty of signs of life. The economy grew at a 2.6% annual rate in the third quarter. Economists expect the October employment report to show job growth above 200,000 on Friday.

Fed Chairman Jerome Powell will hold his press conference that begins at 2:30 p.m.

Follow: MarketWatch’s live blog on financial markets

The yield on the 10-year Treasury note
TMUBMUSD10Y,
4.008%

has risen steadily from last summer to over 4%.

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