The Fed approved a third consecutive rate hike to fight inflation

KBTX First News at Four(Recurring)
Published: Sep. 21, 2022 at 7:21 PM CDT
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BRYAN, Texas (KBTX) - In a historic move, the Federal Reserve approved a third consecutive 75-basis-point hike.

Dennis Jansen, Director of the Private Enterprise Research Center and the Jeff Montgomery Professor of Economics at Texas A&M University, joined First News at Four to discuss the Fed’s attempt to quell inflation.

According to Jansen “the interest rate we’re really talking about” is the federal funds rate--an overnight lending rate between financial institutions. He says the federal funds rate has been “quite a bit” higher in the past than it is today. At the same time, the federal funds rate and the interest rate on reserves being around 3.15 percent are higher than it’s been in recent times.

“We’ve had the rate be as low as practically 0 [percent] for a fair amount of time during and right after the, I’ll call it the COVID recession,” explained Jansen.

The Fed’s idea is to raise the interest rate on this short-term overnight interest rate and intends to raise interest rates at longer maturities. Jansen thinks the one that matters most is the mortgage interest rate, though he points out that “there’s not a one-to-one link” between the two.

For example, he says, “the mortgage rate was about 5 and 5.8 percent, almost 6 percent back in June when this federal funds rate was 1.65 percent, and the Fed now twice has raised the federal funds rate by 3/4 of a point, and yet the mortgage rate today is only slightly higher.”

Before these rate hikes stop, the Fed aims to get the inflation rate close to 2 percent. Currently, it’s well over 5 percent by the Fed’s preferred measure.

Jansen says there’s a bit of a conundrum with GDP growth very low, but the unemployment rate being quite low as well. Economists are predicting a continued tight labor market but low growth in output.