Federal Reserve officials made their fourth supersize interest rate increase in a row on Wednesday and signaled that they planned to lift rates higher than they had previously anticipated as inflation proves surprisingly rapid and stubborn.
Markets gyrated as investors tried to digest the central bank’s two-part message. The Fed made clear in its policy statement that it would soon slow down the rate increases, giving officials more time to see how the economy was digesting its moves to date. That pushed stocks higher as investors sensed a letup in the Fed’s aggressive push to constrain the economy.
But Jerome H. Powell, the Fed chair, underscored during a news conference after the central bank’s two-day meeting that policymakers were dedicated to wrestling price increases lower and were nowhere near stopping their efforts to raise borrowing costs and slow growth. The Fed lifted rates another three-quarters of a point this week, setting them in a range between 3.75 and 4 percent.
Mr. Powell’s stern stance sent stock prices plummeting, with the S&P 500 ending the day down 2.5 percent.
“It is very premature to think about pausing,” Mr. Powell said on Wednesday. When asked how markets should interpret his remarks, he said officials would most likely raise rates higher than their previous forecast, which showed rates peaking at 4.6 percent next year. They also expect to keep them elevated for some time.
“We have a ways to go,” he explained. “I would want people to understand our commitment to getting this done.”
Mr. Powell’s Fed is trying to strike a delicate balance: Officials want to stop raising interest rates so rapidly, now that borrowing costs have reached a relatively high level. Moving more gradually will give them a chance to see how markets and the economy are digesting each change, reducing the chance of an unnecessarily painful recession. At the same time, central bankers do not want to suggest to investors — or consumers — that they are abandoning their drive to slow down the economy and contain the fastest inflation in 40 years.
What the Fed’s Rate Increases Mean for You
A toll on borrowers. The Federal Reserve has been raising the federal funds rate, its key interest rate, as it tries to rein in inflation. By raising the rate, which is what banks charge one another for overnight loans, the Fed sets off a ripple effect. Whether directly or indirectly, a number of borrowing costs for consumers go up.
If markets expect the central bank to pull back, stock prices may soar and money could become easier and cheaper to borrow. That would work against the Fed’s goals, making it all the more difficult to slow demand and weigh down price increases. Mr. Powell probably wanted to avert that kind of market reaction and tried to do so by emphasizing how far the Fed has to go before it will have done enough to vanquish inflation, economists said.
“They are still worried about inflation getting entrenched,” said Aneta Markowska, chief financial economist at Jefferies. “It doesn’t look like a Fed that’s anywhere near pausing.”
The Fed has already lifted interest rates six times this year: They were set to near zero as recently as March. Officials previously signaled that they might slow their rate increases at their next meeting, which is scheduled for Dec. 14, by raising rates half a point. That moderation remains possible, Mr. Powell said on Wednesday, but is not guaranteed.
“That time is coming: It may come as soon as the next meeting, or the one after that,” he said. “No decision has been made.”
Borrowing costs are a blunt tool for controlling inflation and work with long lags, so there is always a risk of overdoing rate increases and slowing the economy more than is necessary to bring inflation down.
The Fed spent much of 2022 trying to quickly raise interest rates to a level where they are clearly constraining the economy. Now policymakers think rates are in that ballpark, which is why they have signaled that it will soon be prudent to make future mores more cautiously.
To that end, they added a line to their postmeeting statement acknowledging that they will take into account how much rates have already moved and how long rate changes take to play out as they set policy going forward.
But there is also a risk to underdoing the fight against inflation: If price increases remain rapid for a long time, consumers and businesses may come to expect persistently faster inflation. Workers might demand bigger pay increases, and companies might make frequent price increases a more standard part of their operating playbook. Quick inflation could become a permanent feature of America’s economy — one that would be even more painful to stamp out.
“We’re now 18 months into this episode of high inflation, and we don’t have a clearly identified, scientific way of understanding at what point inflation becomes entrenched,” Mr. Powell said. “The thing we need to do, from a risk-management standpoint, is use our tools forcefully but thoughtfully and get inflation under control.”
On Wednesday, Mr. Powell called the question of when to slow rate increases “much less important” than the questions of how high to raise interest rates and how long to keep them high.
The Fed previously forecast that interest rates would rise to 4.6 percent next year before coming back down in 2024, but Mr. Powell suggested that the end level was likely to be higher because inflation remained rapid and both consumer demand and the labor market remained hot.
While central bank policy takes time to work its way through the economy and slow inflation, both consumer demand and the job market have been surprisingly resilient so far.
The housing market has cooled in response to rapidly rising mortgage rates, but families continue to shop and an array of corporations have predicted a vibrant holiday season. Employers continue to hire at an unusually rapid clip, although the pace is slowing somewhat. Job openings remain elevated. An employment report set for release on Friday will provide another update on the state of the labor market, and is expected to show continued hiring.
As companies compete for workers in the tight labor market, pay is rising. An index of wages and salaries that the Fed watches closely, the Employment Cost Index, remains strong.
“The broader picture is of an overheated labor market,” Mr. Powell said. The Fed is looking for evidence of a gradual softening, but so far such signs are “not obvious to me.”
Businesses are trying to cover rising labor costs and higher input prices, and many are taking advantage of strong demand to swell their profits. That has led to continued price increases across a variety of goods and services.
A key measure of inflation that the Fed watches closely showed that prices climbed 6.2 percent over the year through September — far higher than the central bank’s target of annual gains of 2 percent on average over time. After food and fuel prices were stripped out of the data to get a clearer sense of underlying trends, inflation was above 5 percent.
Some of that pickup was driven by housing costs, which many economists expect will slow next year, thanks to a cool-down sweeping rental markets in major cities. But some of it is attributable to other services, which is more likely a consequence of rising pay. That sort of inflation will probably take longer to fade away.
Inflation’s stickiness could make it more difficult for the Fed to slow the economy gently, lowering demand and cooling price increases without pushing unemployment higher — what officials often call a “soft landing.” Asked whether a path to that good outcome still exists, Mr. Powell was blunt.
“Has it narrowed? Yes,” he said. “Is it still possible? Yes.”
But he emphasized that the key issue, for now, was wrestling prices back under control.
“If we were to over-tighten, we could then use our tools strongly to support the economy,” Mr. Powell said. “Whereas if we don’t get inflation under control because we don’t tighten enough, now we’re in a situation where inflation will become entrenched. And the costs — the employment costs, in particular — will be much higher.”
Mr. Powell’s upshot was simple: “We have some ground left to cover here. And cover it we will.”