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Fed Raises Interest Rates 75 Basis Points, Signals More Hikes To Come

Federal Reserve Chairman Jerome Powell

The Federal Reserve has once again raised interest rates by 0.75 percentage points after another month of unexpectedly high inflation.

The increase was widely expected by Wall Street, but the Fed has also signaled additional large increases are likely as it fights to bring inflation under control, The Wall Street Journal reported.

Federal Reserve Chairman Jerome Powell said he was committed to bringing inflation back down to 2%, even if it meant additional pain in the labor market.

"We want to act aggressively now and get this job done and continue to act until we get it done,” Powell said at a press conference Wednesday.

Stocks plunged last week after the U.S. Bureau of Labor Statistics revealed the consumer price index rose 8.3% year-over-year in August, undercutting hopes that the Fed was moving aggressively enough to slow price increases.

Powell said the cost of shelter has been one of the key drivers of inflation this year, and he said the housing market was probably in need of a correction in order to bring supply and demand in line. 

"I think that shelter inflation is going to remain high for some time. We're looking for it to come down, but it's not exactly clear when that will happen," Powell said. "Hope for the best, plan for the worst, so I think on shelter inflation you've just got to assume it's going to remain high for some time."

In reaction to that stubbornly high inflation, the median projection for the federal funds rate by the end of the year is between 4.25% and 4.5%, higher than a path previously set by the Fed this summer.

A majority of Federal Reserve Board members participating in the latest policy meeting now believe rates need to rise about 1.25 percentage points by December, though Powell declined to lay out how much of that would occur at the next meeting.

Interest rates have increased by three percentage points since the start of the year, leading to a slowdown in financing across the commercial real estate industry.

Despite the interest rates leading to a higher cost of debt and equity, apartment owners have been reluctant to lower prices for properties on the market, leading to the sixth straight quarter of tightening conditions in Q2 of this year, National Multifamily Housing Council Chief Economist Mark Obrinsky said in July.

Earlier this month, the Mortgage Bankers Association also predicted an 18% drop in commercial and multifamily lending compared to last year. 

"At 3%, the rate is now above what most [Federal Open Market Committee] members consider to be the long-term level and should be effective in reducing demand and slowing inflation over time," MBA Chief Economist Mike Fratantoni said in a statement Wednesday after the Fed's announcement. 

Worsening conditions have led projects with financing locked in to rush to start construction, but the number of multifamily building permits issued nationwide fell 18.5% in August, according to Department of Commerce data released Tuesday.

Rising interest rates have led to fears about a recession, though economists caution the market correction might be more akin to the dot-com bust than the Great Recession.

Powell said the labor market would need to loosen somewhat in order to achieve the Fed's policy goals, but he was optimistic the unusually strong market for job seekers today could soften that blow.

"Nobody knows if this process will lead to a recession or if so, how significant that recession will be," Powell said. "The chances of a soft landing are likely to diminish to the extent that policy needs to be more restrictive or restrictive for longer."

UPDATE, SEPT. 21, 3:40 P.M. ET: This story has been updated with comments from Powell's Wednesday afternoon press conference.