It will be hard for the US to avoid a recession next year with the Federal Reserve's rate hikes and Chair Jerome Powell's latest comments, according to experts.
The Fed on Wednesday raised its benchmark interest rate by 75 basis points for the fourth consecutive time to fight record inflation, carrying the target range for the federal funds rate to between 3.75% and 4% -- its highest since January 2008.
Although investors were waiting for a more dovish stance from the Fed, Powell adopted an unexpectedly hawkish tone in his post-meeting news conference when he said there are “some ways to go” with rate hikes and the “ultimate level” of increases will be higher than previously expected.
"Just as investors believed they'd secured the dovish pivot they so craved, Chair Powell stepped up to deliver another crushing blow to the markets,” Craig Erlam, London-based senior market analyst for UK & EMEA at trading platform OANDA, said in an email note. “Well, that's how it's been perceived initially but that could change once the dust settles."
Erlam said investors did not want to hear that interest rates could go higher than they previously thought and they still have some way to go.
The Fed will watch for improvement in incoming macroeconomic data and try to ease off the brake ensuring the least economic cost. But that does not mean a recession will be avoided, according to Erlam.
"There are two jobs and inflation reports to come before the December meeting. By that time, things may look a little more promising and less uncertain," he said.
'Powell is appropriately sending a tough message'
Mark Zandi, chief economist at Moody's Analytics, told Anadolu Agency via email that Powell made a point to say rates are going higher and will stay higher for longer than investors were anticipating.
"Powell is appropriately sending a tough message to ensure inflation expectation remain anchored and convince businesses to be more cautious in managing their payrolls and investment and consumers to be more cautious in their spending," said Zandi.
"By so doing, it makes it less likely he will actually need to follow through on this interest rate outlook, thus raising the odds the economy can make its way through the next year without a recession. Avoiding a recession next year will be difficult, but ironically Powell’s tough talk makes it more likely that it will," he added.
Powell said the latest consumer inflation figures since the Fed’s Sept. 21 meeting "suggest to me that we may move to higher (interest rate) levels than we thought at the time during the September meeting."
US annual consumer inflation came in at 8.2% in September, slightly down from the 8.3% yearly gain in August. Producer inflation rose 8.5%, slowing from August's 8.7% increase. The numbers, however, are a sharp decline from record figures earlier this year.
While annual consumer prices posted a 9.1% gain in June, the largest 12-month increase since November 1981, producer prices saw their largest annual jump since a record 11.6% gain in March.
Consumers should lock in higher rates now for greater returns
Zandi said prior to the meeting Wednesday, investors were expecting the federal funds rate to peak at 4.75% - 5%, and to begin falling this time next year. But post-meeting, investors expect rates to peak at 5% - 5.25% and not fall until 2024.
Ben McLaughlin, president of online savings marketplace, SaveBetter.com, said in an email note that the interest rate increases have not curbed inflation but there is always a lag to monetary policy tools.
"How long that lag can be is uncertain, which is why the Fed will likely stop increasing the rates in early 2023. As fears about the economy dipping into a recession grow, we may start seeing more modest rate hikes, 0.5% as soon as December or the Fed’s first meeting in 2023," he said.
McLaughlin noted that rate hikes triggered several rate increases from partner banks and institutions. "These increases have made cash deposit accounts a more attractive offer -- especially given the volatility in the stock market so far this year," he said.
He suggested that consumers should lock in higher rates now to get greater returns on their money before the Fed reverses course.