NewzWASHINGTON (AP) — About six weeks ago, Federal Reserve Chairman Kevin Warsh announced that a divided central bank was keeping its key interest rate unchanged.But on Wednesday, the Fed's rate-setting committee unanimously agreed to a rate hike, and nearly all policymakers signaled that a second increase later this year would likely be appropriate.So what changed?In short, the renewed fighting in the Middle East has pushed up gas prices again. And there are signs the economy is still growing at a healthy pace even as inflation stays stubbornly high. All three factors appear to have pushed the committee from wait-and-see mode to determined action.Yet the Fed's move doesn't necessarily mean Americans will pay significantly higher costs for mortgages or other borrowing in the short-term, because financial markets appear reassured by the Fed's commitment to fighting inflation.
On Thursday, the 10-year Treasury yield even slipped a bit, a likely sign of reduced inflation worries among investors.The Fed's increase “alleviates concerns around the Fed taking sticky inflation seriously,” Oscar Munoz, head of U.S. economic research at TD Securities, said. “And that they’re ready to act, not just talk about it but actually act.”The Fed increases the short-term rate it controls to slow borrowing and spending and ideally cool inflation.
The Fed's rate can influence longer-term costs such as mortgage rates, but the Fed doesn't directly control them.Warsh throws in towel on ‘temporary’ shocksFor months, Fed officials have considered whether higher oil and gas prices from the Iran war would just amount to a temporary hit to inflation. If so, it might not make sense to hike rates: By the time higher borrowing costs started to slow the economy, the gas price shock could be over and inflation would fall back to the Fed's 2% target on its own.But with the Iran war now in its seventh month, Fed officials are no longer counting on it being a temporary shock.At the Fed's previous meeting July 29, its statement said inflation was elevated “in part reflecting supply shocks that have driven price increases in certain sectors, including energy.”But its latest statement Wednesday dropped that reference to supply shocks, and instead noted that consumer and business spending “has been resilient.”And at his news conference Wednesday afternoon, Warsh said, “our judgment about ... stocks are rising Thursday and recovering most of their losses for the week.Falling oil prices and easing pressure from the bond market helped Wall Street reverse many of its moves from the prior day, when the Federal Reserve hiked its main interest rate for the first time in years and suggested more may be ahead as it tries to get the nation’s high inflation under control.The S&P 500 climbed 1.1% and was on track for just its second rise in the last nine days.
The Dow Jones Industrial Average was up 358 points, or 0.7%, as of 2:08 p.m. Eastern time, and the Nasdaq composite was 1.6% higher.Stocks got a boost after the price for a barrel of Brent crude oil slid 1% to $104.79. That’s down sharply from the nearly $110 it reached earlier in the week on worries that the war with Iran will keep oil bottled up in the Middle East instead of going to customers worldwide.Brent is of course still much more expensive than the $72 per barrel that it cost earlier this summer, but Thursday’s slide helped pull yields lower in the bond market and removed some pressure on stocks.
The yield on the 10-year Treasury fell to 4.95% from 5.01% late Wednesday.Higher yields make it more expensive for everyone to borrow money, from the U.S. government to people looking to buy houses to businesses wanting to build data centers. That in turn slows the economy.The Fed on Wednesday raised the short-term interest rate that it controls, the federal funds rate, by a quarter of a percentage point for its first hike in more than three years.
Officials also indicated at least one more increase may be coming this year and that the Fed may then keep the federal funds rate high through next year.The signals sent Wall Street on a roller coaster. Stocks initially held onto their gains from earlier in the day after the Fed made its announcement Wednesday. They then slid sharply before recovering a chunk of the losses before trading ended for the day.On the upside for markets, the shift to higher interest rates built confidence that the Fed is committed to getting inflation back to its target of 2%.
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