Fifteen long months after the Federal Reserve began hiking interest rates, it's hitting pause. But we aren't cracking open the champagne and dancing on inflation's grave just yet.
Here's the deal: Since March of last year, Fed officials have raised the central bank's benchmark interest rate 10 times in a row — its most aggressive monetary tightening campaign in modern history — to try to take the heat off rising prices.
And while not everyone credits the Fed for it, inflation has in fact slowed way down. Last month, consumer prices rose 4% year-over-year, as measured by the Consumer Price Index — well below its peak of more than 9% in June. (To be clear: the Fed prefers the Personal Consumption Expenditures index, or PCE, over the CPI, but either way, the downward trend is the same.)
That's good news! But 4% is still too high for the Fed, which is committed to bringing inflation down to around 2%. In other words: More rate hikes are coming.
Here's how the Silver Fox of the Fed, Jay Powell, summed it up at a news briefing today:
"It seems ... to make obvious sense to moderate our rate hikes as we got closer to our destination. The decision to consider not hiking at every meeting and to hold rates steady at this meeting is a continuation of that process."
Translation: The Fed may be back on the rate-hike game at its next meeting in July.
Why the pause?
Interest rates are a blunt tool to slow the economy down (by making borrowing more expensive) or speeding it up (by making borrowing cheaper). They also take a loooong time to take effect.
To borrow a metaphor from Peter Boockvar, the chief investment officer of Bleakley Financial Group: The Fed has gobbled up a bunch of edibles — the sort that a college freshman might sample at a party and (predictably, foolishly) over-consume because they believe the desired effect hasn't kicked in. It's only after the lag ends that you realize your mistake, and by then it's too late to undo it.
Wall Street's reaction was mixed. Investors had broadly anticipated the Fed's decision, but they sold off equities after J-Pow's Q and A with reporters. The news that not one Fed policymaker forecast a rate cut this year got stuck in their craw.
"Inflation has not really moved down. It has not reacted much to our existing rate hikes. We're going to have to keep at it," Powell said.
The S&P 500 and Nasdaq, which were positive before these comments, plunged into the red following the gloomy outlook. The Dow ended the session down 231 points, or 0.7%, while the S&P 500 slipped 0.08%.
RELATED: Why the Fed's rate-hike breather won't feel like much of a relief to consumers.
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