The Fed is about to undertake another big interest rate hike. Many are wondering what’s next

The Federal Reserve is expected to order another sharp increase in interest rates on Wednesday, as questions arise about rising borrowing costs before stubborn inflation begins to ease.

The central bank has already raised its benchmark interest rate by 3 percentage points since March, and it is expected to tack another 3/4 of a point at this week’s meeting. This is the most aggressive round of rate hikes in decades, but so far it has failed to bring prices under control.

“Interest rates have been rising at breakneck speed, and we’re not done yet,” said Greg McBride, chief financial analyst at Bankrate. “It will take some time for inflation to come down from these high levels, even once we start to see some improvement.”

Annual inflation in September was 6.2%, according to the Fed’s preferred benchmark, unchanged from the previous month. The better-known consumer price index shows that prices are rising even faster, at an annual rate of 8.2%.

“The Fed is looking at a number of different inflation barometers, and none of them are really pointing in the right direction,” McBride said.

It’s possible that Wednesday’s rate hike will be the last big hike in quite some time. Markets will be on the lookout for any signal that the Fed plans to return to a lower increase in December. But McBride argues that to rein in inflation, borrowing costs will likely need to remain high for an extended period.

“The mantra for 2023 is ‘higher for longer,'” he said. “When inflation is running at 6, 7, 8% and the target is 2%, it’s going to take a while.”

Rate hikes have an effect, even if inflation remains out of control

Rising borrowing costs have already taken a toll on the housing market. And other sectors of the economy are starting to slow down. But consumers, still full of money saved at the start of the pandemic, continue to spend money. As a result, the Fed may have to press the brakes harder, for longer, than it would otherwise.

“We see today that there is still some reserve of savings for households, which could allow them to continue to spend in a way that maintains strong demand,” said Federal Reserve Chair Esther George. Bank of Kansas City. “That suggests we may have to keep going for a while.”

Like his colleagues on the Fed’s rate-setting committee, George has expressed a determination to control inflation. But she also warned against raising rates too quickly in times of economic uncertainty.

“I’ve been on the more stable and slower side [rate increases]to start seeing how these effects of a lag play out,” George said last month. “My concern is that a succession of very large rate hikes could cause you to oversteer and not be able to see those turns.

With polls showing inflation to be a top concern for voters, the Biden administration and most members of Congress have stayed away from the Fed as it tries to control prices. But a handful of Democrats have begun to challenge the central bank’s approach, warning that aggressive rate hikes could put millions out of work.

“We are deeply concerned that your interest rate hikes may slow the economy while failing to slow rising prices that continue to hurt families,” Sen. Elizabeth Warren, D-Mass, wrote Monday. ., and his colleagues in a letter to the Fed Chairman. Jerome Powell.

The housing market has already slowed, with mortgage rates hitting 7% for the first time in two decades.

Kansas City homebuilder Shawn Woods said his business grew from selling a dozen homes a month before the Fed started raising rates to less than five.

“Never in my wildest dreams would I have thought that we would go from 3% [mortgage rates] to 7% in six months,” said Woods, president of Ashlar Homes and the Home Builders Association of Kansas City.

“I think we’re going to go about six or eight months,” Woods said. “Generally, housing takes us into downturns and out of them. And I think from a housing perspective, we’ve probably been in a housing slump since March or April.”