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Federal Reserve lifts interest rates another 0.75 percentage point

Investors react to Fed's rate hike
Investors react to Federal Reserve's aggressive interest rate hike 05:26

The Federal Reserve raised its key interest rate another three-quarters of a percentage point as it battles the hottest inflation in decades. 

The move by the central bank's rate-setting committee, announced Wednesday after a two-day meeting, marks the sixth rate hike this year and the fourth consecutive 0.75 percentage point jump since June. The jumbo increase was widely expected by Wall Street given that inflation has remained stubbornly high despite the Fed's aggressive campaign to curb sharply higher prices.

The Fed's target rate is now in the range between 3.75% and 4%.

The rate indicates how much banks pay to borrow money from the Fed, which in turn affects how much it costs consumers and businesses to borrow and feeds into rates for mortgages, credit-card debt and car loans. The rate hikes to date have brought the average mortgage rate above 7%, its highest level in 20 years.

Fed hints it may slow pace of rate hikes

Despite another big step up in the federal funds rate, policy makers hinted that they are open to slowing the pace of hikes as their monetary tightening slows the economy. 

"In determining the pace of future increases in the target range, the Committee 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," it said in a statement.

Stock markets briefly surged on the announcement, seemingly in the belief that an end to the cycle of rising interest rates was near. But they sank after Fed Chair Jerome Powell told reporters that the bank would continue to raise rates.

"It is very premature to be thinking about pausing," Powell said in a news conference after the Fed's rate announcement. 

Powell reiterated his view that the job market is too strong, with a historically low rate of unemployment and excess job openings relative to the number of workers available to fill them. He also hinted that the central bank preferred to raise interest rates too high — potentially throwing the economy into a recession — rather than risk keeping rates too low to bring down inflation.

But rates likely to keep rising

"If we were to overtighten, we could then use our tools strongly to support the economy," he said. " Whereas, if we don't get inflation under control... now we're in a situation where inflation is now entrenched and the employment costs, in particular, will be much higher potentially."

The message, economists say, is that the Fed will keep raising interest rates to a higher level, although it may do so more slowly.

"More, but less, is the message the Fed is trying to portray as more hikes are needed, but possibly at a slower pace," Charlie Ripley, senior investment strategist for Allianz Investment Management, said in a research note.

"Powell and committee are trying to balance the optionality of further tightening against the work that has already been done. This does not change the fact that they want to implement a policy plan that is restrictive enough to slow the economy"

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