As expected, the Federal Reserve today announced another significant hike in interest rates this year—raising the federal funds rate by another 75 basis points.  With today’s increase, the Fed took the federal funds target rate to a range of 3.75 to 4 percent from near-zero levels in March.

Looking ahead, Fed Chair Jerome H. Powell stated, "We continue to anticipate that ongoing rate increases will be appropriate." However, Powell indicated that it may “become appropriate to slow the rate of increases" in coming months and that the ultimate federal funds rate achieved through these increases may exceed the Fed’s guidance in September. "We have some ground yet to cover here, and cover it we will," Powell said.

In determining the pace of future increases, the Fed 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, he said.

As the rates continue to trend up, it will become more expensive to refinance debt that matures and more expensive to otherwise access capital. Further, the stickiness of inflation and the potential need to raise rates above prior guidance decrease the probability of a soft landing and increase the risk of a recession in 2023.

Other Notable Indicators

Annual inflation rate was 8.2 percent for the 12 months ended September 2022, after previously climbing to 8.3 percent, according to U.S. Labor Department. An update is expected on Nov. 10.  "Despite elevated inflation, longer term inflation expectations appear to remain well anchored," Chair Powell said, "but that is not grounds for complacency. The longer the current bout of higher inflation continues the greater the chance that high expectation of inflation will become entrenched."

Job openings increased to 10.7 million on the last business day of September, the U.S. Bureau of Labor Statistics reported yesterday, indicating a continued tight labor market. Hires edged down to 6.1 million, while total separations decreased to 5.7 million. Unemployment, Chair Powell said, is at a 50-year low. "Job vacancies are still very high and wage growth elevated," he said.

Higher mortgage rates have weakened demand for new housing. Builder sentiment dropped for the 10th straight month in October. Builder confidence in the market for newly built single-family homes dropped eight points in October to 38—half the level it was just six months ago—according to the National Association of Home Builders/Wells Fargo Housing Market Index. "Activity in the housing sector has weakened significantly largely reflecting higher mortgage rates," Chair Powell said.

Multifamily rent growth continued to decelerate, according to the Yardi Matrix Multifamily Report. The average U.S. asking rate was $1,718 in September, the same as in August. Year-over-year rent growth was down more than a full percentage point for the third month in a row, bringing it under 10 percent for the first time since July 2021.

Office leasing in every major industry except for technology remained soft, according to JLL. Most of the largest office tenants have downsized their office footprints since the end of 2019. Volume in the large U.S. in the third quarter was 40 percent lower than pre-pandemic levels.

Real gross domestic product (GDP) increased at an annual rate of 2.6 percent in the third quarter of 2022, following slight declines in the first and second quarters. There is some industry-wide concern based on the underlying information that growth will turn down in 2023. "Recent indicators point to modest growth of spending and production this quarter," Chair Powell said.

The Bottom Line

Chair Powell’s comments make clear that, while the Federal Reserve may slow the pace of rate increases going forward, there will be additional rate increases in coming months. The Federal Reserve remains very focused on taming inflation, believes it has made little progress to date in controlling inflation, and sees a strong consumer with savings as giving the Fed more room to act. While no one knows if a recession will occur or not, today’s action, Chair Powell’s comments, and recent economic indicators add to the case that a soft landing of the economy is becoming less likely.

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