The Fed raised the target for the Federal Funds Rate by three-quarters of a percentage point today, making another aggressive move to, as Fed Chair Jerome Powell suggests, induce “pain in the economy” as the cost of reducing inflation. The biggest news was not today’s increase, but the plans for where rates go from here.
Combined with the increases made in June and July, the Fed has now moved the target rate more in 120 days than at any point since 1981.
The current short-term rate level is now considered restrictive, meaning that this level of rates will cause the economy to slow. And the Fed is not done. Their new dot plots reflect they want rates to be 1.25 points higher by year-end and another .25 points in 2023. Perhaps worse still, the dot plots indicate rates remain restrictive through 2025, although the absolute level may come down slightly.
We have seen auto loan rates move this summer to be consistent with the Fed moves through July. In housing, mortgage rates have moved even more.
The Fed wants to see less credit flowing as a key part of their plan to induce pain, and they are getting what they want. The problem may soon be that they are not taking time to see the impact of their moves before doubling down.