Fed’s rate hike is the most aggressive since the 1980s

As expected, the Federal Reserve is accelerating its interest rate hikes to slow down the economy (and thus inflation). The US central bank on Wednesday raised the short-term federal funds rate by 0.75 percentage points to 3.25%, representing three consecutive rises of 0.75 points in the official price of money. That is already the sharpest tightening of monetary policy since the early 1980s, when Paul Volcker headed the Fed. The title of Volcker’s autobiography, Keeping At It, has become a personal motto for current Fed chief Jerome H. Powell.

He pronounced the phrase in August at a leading economic gathering in Jackson Hole (Wyoming) and on Wednesday he repeated it a few times: “The FOMC [Federal Open Market Committee] is strongly resolved to bring inflation down to 2%, and we will keep at it until the job is done.” What does this imply? According to the forecasts by the majority of the members of the committee, it means raising rates to around 4.38% by the end of the year, up from the current 3%-3.25%.

A majority of committee members foresees an additional tightening of 125 basis points (1.25 percentage points), although there are almost as many who feel the hike will be 100 basis points. The decisions will be made at two monetary policy meetings scheduled for what’s left of the year, one on November 1-2 and another on December 14-15. Until then, it seems clear is that there will be two more sharp rate hikes on those dates, most likely 75+50 basis points or else 50+50.

Powell has altogether stopped talking about the neutral interest rate, the one that neither slows down nor stimulates the economy. Initially, his purpose was to get there and then reevaluate the situation. Now he is speaking openly of a restrictive monetary policy and his view is that after this week’s rise, there is still “a way to go.”

The tone of his entire news conference was markedly hawkish: “No one knows whether this process will lead to a recession or if so how significant that recession would be.”