The Federal Reserve increased its benchmark interest rate by an additional 75 basis points for the fourth straight time. There was little doubt as to what would be announced yesterday given the current situation and the government’s resolve to bring inflation down to the 2% level it considers desirable.
Following the Federal Open Market Committee, or FOMC, meeting in November, the Fed issued a press release stating that recent data point to modest expansion in spending and production. Recent months have seen a strong increase in job creation, and the unemployment rate has stayed low. The pandemic’s effects on supply and demand, rising food and energy costs, and other pricing pressures are all still being felt in the form of soaring inflation.
Additionally, the conflict between Russia and Ukraine and related issues like pressure on energy costs and supply chain disruptions for key foods are adding further upward pressure on inflation and dragging on global economic activity.
Then there was the increase in unfilled positions to 10.7 million, which, according to the Bureau of Labor Statistics, largely offset the decline in August. The Fed has been looking for news that shows drops in prices as well as an increase in unemployment. However, according to different BLS data, unemployment rates were higher in 27 regions and stable in eight areas in September compared to a year earlier.
However, the Fed has come under increasing amounts of fire. One common issue is that it takes many months for rate adjustments to have an impact and ripple across the economy. The Fed has taken the risk of taking action when it is unsure of what the final outcome will be by continuing to boost rates, leading to what is known as a positive feedback loop in engineering and control theory. It’s analogous to driving a car, striking a skid on a wet or snowy surface, and then turning in the opposite direction of how the automobile is shifting, potentially spinning the car 360 degrees.
As a result, the following statement from the Fed’s statement yesterday stood out: “In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”
It was the first sign that the Fed would scale back its rate increases in the future in order to more accurately gauge the impact of its actions thus far. However, there is no published schedule.
According to Charlie Ripley, senior investment strategist at Allianz Investment Management, the real question investors are looking for answers to is when the Fed will halt the pace of rate hikes and Chairman Powell will attempt to tiptoe around the topic as much as possible. The Fed has maintained the status quo for the time being by saying that the main goal is to see “proof” of inflation lowering, but in actuality, they need to start taking into account the natural lag between monetary policy choices and their effects on the economy.
Additionally, there was a warning about what else might occur: The Committee would be prepared to change the stance of monetary policy as necessary if risks develop that could obstruct the achievement of the Committee’s goals.
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