No Relief From Federal Reserve Raising Interest Rates

In this article:

• Fed commits to policy – no matter how harsh
• More, higher base interest rates planned
• Likely “painful in the near term”

Don’t expect the Federal Reserve (Fed) to ride in and save the day for the stock market or traders.

Central bankers again today stayed on point for tighter monetary policy.

And plans are for this to continue through next year, so traders should adapt as needed.

No relief from Fed raising interest rates

Inflation is holding at a 40-year high and the Fed is committed to policy, however harsh, that gets the job done to slay this beast.

“The key challenge facing our economy is unacceptably high inflation,” said Cleveland Federal Reserve President Loretta J. Mester during a speech in Dayton, Ohio.

The year-over-year inflation rate rose by 8.5% in July, less than forecasts and down from 9.1% the previous month. Despite the lagging numbers, inflation remains at 40-year highs – not seen this high since November 1981. New numbers are expected Sept. 13.

The Fed plans to continue raising benchmark interest rates after raising rates a cumulative 2.25% since March. The Fed benchmark rate range sits at 2.25%-2.5% with another .75% planned for late September.

“Given current rates of inflation, I believe that the Fed has more work to do in order to get inflation under control,” Mester said. “This will entail further rate increases to tighten financial conditions, resulting in an economic transition to below-trend growth in nominal output, slower employment growth, and a higher unemployment rate.”

“The FOMC (Federal Open Market Committee) is committed to using its tools to bring inflation back down to our longer-run goal of 2 percent,” Mester stated. “In my view, it is far too soon to conclude that inflation has peaked, let alone that it is on a sustainable downward path to 2 percent.”

Expect more of the same from the Fed

Mester believes the Fed must stay the course in this inflation battle through 2023.

“Given the current level of inflation and the economic outlook, I anticipate that policy will need to move into a restrictive stance in order to put inflation on a sustained downward trajectory to 2 percent,” she said. “My current view is that it will be necessary to move the fed funds rate up to somewhat above 4 percent by early next year and hold it there.

“I do not anticipate the Fed cutting the fed funds rate target next year.”

Overall, the Fed is committed to returning to price stability in the U.S. economy.

“Price stability is the foundation of a strong economy,” Mester said. “The return to price stability will take some time and a lot of fortitude. There will be bumps along the road.”

Traders should prepare for more uncertainty

Traders can expect to continue dealing with an uncertain market.

“Financial markets could well remain volatile as financial conditions tighten further; growth could slow more than expected; and the unemployment rate could move above estimates of its longer-run level,” Mester said. “This will be painful in the near term but so is high inflation.”

The Fed is also continuing to reduce the size of its balance sheet.

“Reducing the amount of the Fed’s securities holdings will help to lessen downward pressure on longer-term interest rates by returning duration to the market,” Mester said.

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