The Federal Reserve just upped the ante in its inflation fight (again). A central bank expert explains what it means and what happens next.
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Phil Rosen
Nov 3, 2022, 16:49 IST
In this March 20, 2019, file photo, Federal Reserve Chair Jerome Powell speaks during a news conference in Washington.AP Photo/Susan Walsh
Friday eve is so much better than Christmas eve because we get to celebrate every week. Phil Rosen here — it's good to see you today.
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In case you missed it, you should know the Federal Reserve yesterday raised interest rates by 75 basis points.
Now, the Fed's benchmark rate is the highest it's been since 2008.
Remember, this rate influences borrowing costs for all kinds of consumer loan products. So higher rates mean you're paying more for credit cards, auto loans, and mortgages.
It also means we may be closer to a recession (if we aren't there already).
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The thinking goes like this: The more the Fed raises rates, the less money people will spend, so the economy will "cool down." But if the Fed gets too aggressive, it risks cooling the economy too much — a.k.a., a recession.
To make sense of all this Fed talk — and better explain it here in Opening Bell — I caught up with a veteran Fed watcher last night.
Scroll down and let's get to the good stuff.
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1. In his Wednesday press conference, Chairman Jerome Powell reiterated the central bank's commitment to bringing down inflation, made evident by the three-quarter point move.
In his view, policymakers haven't overdone it with rate hikes. Powell said that a "sustained period of below-trend growth" will likely be needed to lower inflation, and the Fed must avoid the mistake of not doing enough.
For those who haven't studied Fedspeak, here's a translation: It'll likely take a recession to meaningfully bring down inflation.
Treasury yields shot higher during his comments, and stocks gyrated before closing steeply lower on the day.
Lundy Wright, senior vice president at Weiss Multi-Strategy Advisers, has been keeping tabs on the Fed for decades. He told me on a phone call last night how Powell seemed to signal that the pace of tightening would ease, but that they would continue for longer.
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"We're heading into a less data-dependent Fed, in terms of a month-to-month reaction, and a Fed that's hoping to observe and aggregate data over a longer horizon before they act," Wright said.
At the same time, though, Wright maintained that a pause won't be coming anytime soon, as Powell said in as many words, and that the central bank will be taking aim at jobs moving forward.
"There's no pivot," Wright said. "The Fed indicated that, effectively, a step down is possible if not probable, but because they elevated the terminal rate, no one can embrace a real pivot."
To translate Fedspeak again: The Fed wants to increase unemployment.
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"It is very premature to think about pausing," according to Powell. "We have a ways to go."
Before the December Fed meeting, two more inflation reports will come out, as well as additional jobs data. Once those clock in, Wright expects the Fed to announce a 50-basis-point hike to kick off a series of less extreme moves.
"The heavy lifting is done and now it's toning," Wright said. "The Fed doesn't want to say it's the finishing touches but they're hopeful it is."
The Fed's Wednesday announcement was basically a lock, but so far on Wall Street, there's no consensus for what happens next.
Goldman Sachs and Morgan Stanley, for example, expect a 50-basis-point move at the next FOMC meeting in December.
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Others like Barclays and Deutsche Bank, though, are in the 75-basis-point camp.
What's your takeaway from the Federal Reserve news? What do you expect the Fed to do in December?
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