September 21, 2022: Fed raises interest rates by three-quarters of a percentage point

Stocks fell after the Federal Reserve approved a third consecutive three-quarter-point interest rate hike. Investors had been closely watching for how aggressive the central bank would be in its battle to curb inflation. Higher interest rates generally hurt corporate earnings and stock prices.

The Dow fell by 244 points, or 0.8%.

The S&P 500 was down 0.8%.

The Nasdaq Composite slid 0.9% higher.

Consumers and investors need to get used to significantly higher interest rates as the Federal Reserve looks to fight inflation ... even though that may slow the economy to a crawl.

The Fed indicated in its so-called dot plot Wednesday that the median forecast for where rates will finish 2022 is now 4.4%. That's up from a projection of 3.4% in June. The Fed raised rates again Wednesday to a range of 3% to 3.25%, a three-quarters of a percentage point increase.

But the Fed also cut its outlook for economic growth. Central bankers now have a median forecast of just a 0.2% annualized increase in America's gross domestic product. That's down from expectations of 1.7% in June.

The Fed also modestly boosted its forecasts for the unemployment rate this year, to 3.8% from 3.7% in June, and for inflation. Fed members indicated that personal consumption expenditures, their preferred measure of inflation, will rise 5.4% in 2022. The Fed had forecast a 5.2% increase for PCE in July.

The Federal Reserve made history on Wednesday, approving a third consecutive three-quarter-point hike in an aggressive move to tackle the white-hot inflation that has been plaguing the US economy.

Prospective home buyers (and sellers) probably won't be too thrilled to see the Fed jack up interest rates sharply once again Wednesday.

"The housing market is feeling the effect of higher interest rates," said Danielle Hale, chief economist with Realtor.com, on the CNN Business "Markets Now" show.

"As the Fed continues to tighten and we need to make further progress against inflation, it does raise the odds of further sluggishness in home sales," Hale told host Alison Kosik.

Existing home sales plunged in August, the seventh straight monthly drop. Housing prices remain high despite the weaker demand and mortgage rates have soared as the Fed has raised rates.

Hale said "homeowners still have a lot of options" thanks to the surge in real estate prices over the past few years. That's why she thinks sellers might still be more willing to make a deal to get a transaction done.

But Hale said the bigger problem is that it's more difficult for prospective buyers to qualify for a mortgage as rates continue to tick up. That's not likely to change anytime soon.

Market experts are worried that the Fed's series of aggressive rate hikes could slow the economy (as well as profit growth) more than investors currently expect.

"The Fed almost always over-tightens because it uses lagging indicators," Tom Porcelli, chief U.S economist with RBC Capital Markets, told Alison Kosik on the CNN Business "Markets Now" show. "It has to wait for everything to be out in the open."

Porcelli, who expects the Fed will raise rates later Wednesday by three-quarters of a percentage point for the third consecutive time, added that a full percentage point hike is unlikely despite strong inflation data because Powell hasn't prepared Wall Street for such a big move.

"He does not want to spook the market," Porcelli said.

Still, even another 75 basis point hike will likely hurt the stock market. That's because the series of big rate increases should eventually lead to a slowdown in profits and the economy.

"People haven't considered the amount of earnings declines and the impact on the markets," David Bailin, chief investment officer with Citi Global Wealth Investments, told Kosik.

Bailin said it's possible that stocks could fall back to their lows of the year from June. And he added that the "boldness" of the Fed's moves probably won't be fully felt in the job market for another three to six months.

"There's a real risk to the economy. It's why we're worried about corporate earnings next year," he said.

To understand the Fed’s thinking, it helps to get inside the mind of its chairman, Jay Powell. 

In his role as the central bank chief, he’s made no secret of his admiration for Paul Volcker, whose name is practically synonymous with fighting inflation at all costs, even if it crashes the economy into a recession, as Volcker's Fed did — twice — in the early 1980s. 

Powell, in his now notoriously blunt Jackson Hole speech last month, appeared to fully embody his predecessor when he declared that “we must keep at it until the job is done” — ("it," being rate hikes and "the job" being tamping down inflation.) That was an explicit reference, whether he intended it or not, to the ideology of Volcker, whose 2018 autobiography is titled “Keeping At It.” 

During congressional testimony in the spring, Powell said of his hero: “I think he was one of the great public servants of the era — the greatest economic public servant of the era.”

Part of the reason Volcker is remembered so favorably is because it took a savvy mind and an iron stomach to even confront the problem of rampant inflation, and then implement the painful shock therapy of interest rate hikes that cost millions of people their jobs. Volcker's plan worked, but it wasn’t easy. There was indeed some pain, in modern Fed parlance.

Powell faces a similar conundrum. Inflation is the highest it’s been since Volcker ran the Fed, and the central bank itself is facing a crisis of credibility after not moving fast enough to keep rising prices in check.

Credibility was a big concern for Volcker as well. 

“Volcker’s mantra, one he told me again and again through 2008-9, was that in a crisis the only asset you have is your credibility,” Austan Goolsbee, an economist who advised the Obama administration, wrote in 2019 just after Volcker died at age 92. 

If Powell continues to draw from the Volcker playbook, it’s safe to assume his hawkish leadership is here to stay until inflation gets down to the Fed’s target rate of 2%. 

The market is betting on more big rate hikes from the Federal Reserve...and that's pushed the 2-year US Treasury yield to 4% for the first time since October 2007.

Investors look closely at the 2-year, especially how it is moving in comparison to the more widely watched benchmark 10-year Treasury yield. The 10-year is now hovering around 3.56%. The fact that the 2-year yield is higher is a phenomenon known as an inverted yield curve.

An inverted yield curve has historically been an accurate predictor of a recession down the road, especially when the curve is inverted for a lengthy period of time and if the curve widens. That's the case now, as the 2-10 curve, which briefly flipped in April, has been inverted since early July.

The surge in these shorter-term bond rates is largely a reflection of the expectations that the Fed is nowhere close to ending its series of large rate increases. Jerome Powell has talked about how inflation is the Fed's main focus right now and even has suggested that there will be "pain" for consumers and businesses as it continues to raise rates.

Powell will talk more about inflation and the economy at a press conference at 2:30 pm ET following the Fed's rate decision announcement at 2 pm.

US stocks opened slightly higher on Wednesday as investors eagerly anticipated the Federal Reserve's interest rate policy decision.

The central bank is expected to announce a 0.75 percentage point rate hike on Wednesday afternoon. Investors will also be closely watching for clues about future rate hikes and the Fed’s commitment to balance economic growth with controlling inflation.

The Dow rose by 147 points, or 0.5%, on Wednesday morning.

The S&P 500 was up 0.5%.

The Nasdaq Composite was 0.4% higher.

The Fed's rate hike won't be the only big news coming out of Washington on Wednesday. The CEOs of seven of the nation's largest banks are testifying in a hearing before the House's financial services committee. (The bank chiefs will do it again Thursday in front of a Senate committee.)

Expect the bank CEOs to be grilled about consumer lending practices. But the CEOs are also likely to lament how Washington is making their jobs harder.

According to prepared remarks, JPMorgan Chase (JPM) CEO Jamie Dimon, arguably the most well-known of the top bank heads, is set to say that "the continued upward trajectory of regulatory capital requirements on America’s already fortified largest banks, particularly when not reflective of actual risk, is itself becoming a significant economic risk."

Dimon claimed that too many rules and restrictions are "bad for America, as it handicaps regulated banks at precisely the wrong time, causing them to be capital constrained and reduce growth in areas like lending, as the country enters difficult economic conditions."

He said that big banks have to do things that are "illogical...like reducing mortgage exposure in order to drive down assets."

"Strong and resilient banks that can support the American economy through a crisis are key to American growth and competitiveness," Dimon added.

The CEOs of Citigroup (C), Bank of America (BAC), Wells Fargo (WFC), Truist (TFC), PNC (PNC) and US Bancorp (USB) are also testifying on Capitol Hill Wednesday and Thursday.