The Federal Reserve raised the federal funds rate 0.75% on Wednesday afternoon, sending the Dow Jones falling more than 500 points.
As inflation remains elevated and core inflation — the price level increase for all items except for food and energy — continues to rise, the central bank’s decision signals that officials are prioritizing a cooldown in cost pressures, even with potential declines in economic activity. Officials also announced rate hikes of 0.75% in June and July.
The Federal Reserve cited robust employment figures as a rationale for the rate hike — although joblessness could see substantial increases under the aggressive rollback of monetary stimulus, Kace Capital Advisors CEO Kenny Polcari said in an interview with The Daily Wire.
“Expect the unemployment rate to go from 3.7% — where it is right now — to probably approaching 5% before this is over,” he remarked. “We could see an unemployment rate go to 6%. That would be very, very difficult considering where we are now.”
Indeed, a number of leading companies across multiple industries — including Meta, Bed Bath & Beyond, Ford, and Goldman Sachs — have announced layoffs this month. “Earning season starts in two weeks, the week of October 10,” Polcari added. “A lot of these companies that are now going to be faced with these very difficult decisions are going to pre-announce the fact that they’re going to miss their numbers. And they’re going to talk about restructuring — restructuring in this case means layoffs.”
Meanwhile, Federal Reserve Chair Jerome Powell announced a terminal federal funds rate — the level at which the rate will rest before the central bank reverses course — of 4.6%. “There’s going to be pressure coming to consumers and Americans from all kind of angles,” Polcari continued. “That’s what you should take away from what happened.”
To stimulate the economy after the lockdown-induced recession, the Federal Reserve had originally pegged a near-zero target interest rate and purchased government bonds from the market. The aggressive rollback of the stimulus from monetary policymakers occurs as inflation rises at the fastest rate in four decades. Price levels between August 2021 and August 2022 rose 8.3%, according to data from the Bureau of Labor Statistics, marking a slight moderation from an 8.5% year-over-year increase in July and a 9.1% year-over-year increase in June.
Powell said during a hawkish speech at the central bank’s recent symposium in Jackson Hole, Wyoming, that officials are willing to “bring some pain” in their efforts to combat rising price levels and return inflation to the long-term target of 2%.
“Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy,” he remarked. “Without price stability, the economy does not work for anyone. In particular, without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all. The burdens of high inflation fall heaviest on those who are least able to bear them.”
Americans now foresee lower short-term and medium-term inflation amid the aggressive rate hikes. Median one-year and three-year inflation expectations both saw steep declines last month, respectively from 6.2% and 3.2% in July to 5.7% and 2.8%, according to data from the Federal Reserve Bank of New York.