Fed Approves Quarter-Point Rate Hike, Signals More Increases Likely
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Fed Approves Quarter-Point Rate Hike, Signals More Increases Likely

Officials are slowing interest-rate increases as they debate when to pause

Thu, Feb 2, 2023 9:02amGrey Clock 4 min

WASHINGTON—The Federal Reserve approved an interest-rate increase of a quarter-percentage-point and signalled plans to raise rates again next month to continue lowering inflation.

The decision Wednesday followed six consecutive rate rises that were larger, including an increase of a half-point in December and a 0.75-point increase in November.

Officials nodded to recent improvement in inflation readings but didn’t significantly alter their guidance in a policy statement released after the meeting regarding coming rate moves.

“The committee anticipates that ongoing increases” in interest rates “will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive,” said the statement, using the same language included in policy statements since last March.

The latest increase caps a year in which the Fed lifted its benchmark federal-funds rate from near zero to a range between 4.5% and 4.75%, a level last reached in 2007. That extends the central bank’s most rapid pace of rate increases since the early 1980s to fight inflation, which hit a 40-year high last year.

One big question heading into Wednesday’s meeting was the extent to which recent economic data had given Fed officials more confidence that inflation and wage pressures had peaked.

In December, most of them penciled in raising the fed-funds rate to a range between 5% and 5.25% this year. After the hike they approved Wednesday, that projection would imply additional quarter-point increases at the Fed’s meetings in March and May, followed by a pause in rate rises.

Many officials had repeated in recent weeks that they still saw such a rate path as appropriate given strong wage pressures, a tight labour market and high service-sector inflation. But officials also said they would base their decisions on how the economy performs in the coming months.

“We can now say for the first time, the disinflationary process has started,” said Fed Chair Jerome Powell at a news conference after Wednesday’s meeting. But he added, “The job is not fully done.”

Mr. Powell said the central bank was trying to manage the risk of raising rates too much and causing unnecessary economic harm with that of not doing enough to bring down inflation. In repeating his longstanding view that the latter mistake would be harder to fix, Mr. Powell said he didn’t want to be in a position where six or 12 months from now, after a halt to raising rates, the Fed would belatedly conclude that it hadn’t done enough to bring down inflation this year and would have to raise rates higher.

“We’re going to be cautious about declaring victory and sending signals that we think the game is won,” he said. “Certainty is just not appropriate here.”

The fed-funds rate influences other borrowing costs throughout the economy, including rates on mortgages, credit cards and auto loans. The Fed is raising rates to cool inflation by slowing economic growth. It believes those policy moves work through financial markets by tightening financial conditions, such as by raising borrowing costs or lowering prices of stocks and other assets.

Officials have been guarded in recent weeks about providing any guidance that might ignite market rallies that could undermine their efforts to fight inflation.

In recent weeks, markets have rallied partly because investors anticipated that the Fed would slow its rate increases this week and remove uncertainty over the rate outlook, which reduces interest-rate volatility. Lower volatility can ease financial conditions.

Markets have also been cheered by news that inflation and wage growth might have peaked last year, which could make the Fed more comfortable in pausing rate increases. Since Fed officials met in December, economic activity has been mixed. Consumer spending has moderated, and manufacturing activity has weakened. But hiring has held steady, pushing the unemployment down to 3.5% in December, a half-century low.

Investors in bond markets increasingly expect that the Fed will cut interest rates later this year because of a sharp slowdown in economic activity that lowers inflation faster than policy makers expect.

Fed officials and some economists, meanwhile, are concerned that the recent decline in inflation could reflect the long-anticipated easing of supply-chain bottlenecks—and that might not be enough to bring inflation down to the Fed’s 2% goal.

“I’m somewhat worried that the market view is based more on hope,” said Karen Dynan, an economist at Harvard University who served in the Obama administration. “Labor markets still look really tight.”

Officials’ deliberations over how much more to raise rates this year and how long to hold rates at some higher level could hinge over how much they think their past increases will slow the economy this year. Debates could also turn on the degree to which wage and price pressures might slow without significant weakness in the job market.

Officials agreed to slow rate rises to gain more time to study the effects of their moves.

Inflation fell to 4.4% in December from 5.2% in September, as measured by the 12-month change in the personal consumption expenditures price index excluding food and energy. Though still above the Fed’s 2% goal, it moderated in the October-to-December period to an annualised 2.9% rate.

“Inflation has eased somewhat but remains elevated,” said the Fed’s policy statement.

Overall inflation is slowing largely because prices of energy and other goods are falling. Large increases in housing costs have slowed, but haven’t filtered through to official price gauges yet. As a result, Mr. Powell and several colleagues shifted attention recently toward a narrower subset of labor-intensive services by excluding prices for food, energy, shelter and goods.

Mr. Powell has said prices in this category, which rose 4% in December from a year earlier, offer the best gauge of higher wage costs passing through to consumer prices.


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Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’

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The Great Wealth Transfer: How rich millennials will invest the billions coming their way

The younger generation will bring a different mindset to how and where their newfound wealth is invested

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There is an enormous global wealth transfer in its beginning stages, whereby one of the largest generations in history – the baby boomers – will pass on their wealth to their millennial children. Knight Frank’s global research report, The Wealth Report 2024, estimates the wealth transfer set to take place over the next two decades in the United States alone will amount to US$90 trillion.

But it’s not just the size of the wealth transfer that is significant. It will also deliver billions of dollars in private capital into the hands of investors with a very different mindset.

Seismic change

Wealth managers say the young and rich have a higher social and environmental consciousness than older generations. After growing up in a world where economic inequality is rife and climate change has caused massive environmental damage, they are seeing their inherited wealth as a means of doing good.

Ben Whattam, co-founder of the Modern Affluence Exchange, describes it as a “seismic change”.

“Since World War II, Western economies have been driven by an overt focus on economic prosperity,” he says. “This has come at the expense of environmental prosperity and has arguably imposed social costs. The next generation is poised to inherit huge sums, and all the research we have commissioned confirms that they value societal and environmental wellbeing alongside economic gain and are unlikely to continue the relentless pursuit of growth at all costs.”

Investing with purpose

Mr Whattam said 66% of millennials wanted to invest with a purpose compared to 49% of Gen Xers. “Climate change is the number one concern for Gen Z and whether they’re rich or just affluent, they see it as their generational responsibility to fix what has been broken by their elders.”

Mike Pickett, director of Cazenove Capital, said millennial investors were less inclined to let a wealth manager make all the decisions.

“Overall, … there is a sense of the next generation wanting to be involved and engaged in the process of how their wealth is managed – for a firm to invest their money with them instead of for them,” he said.

Mr Pickett said another significant difference between millennials and older clients was their view on residential property investment. While property has generated immense wealth for baby boomers, particularly in Australia, younger investors did not necessarily see it as the best path.

“In particular, the low interest rate environment and impressive growth in house prices of the past 15 years is unlikely to be repeated in the next 15,” he said. “I also think there is some evidence that Gen Z may be happier to rent property or lease assets such as cars, and to adopt subscription-led lifestyles.”

Impact investing is a rising trend around the world, with more young entrepreneurs and activist investors proactively campaigning for change in the older companies they are invested in. Millennials are taking note of Gen X examples of entrepreneurs trying to force change. In 2022,  Australian billionaire tech mogul and major AGL shareholder, Mike Cannon-Brookes tried to buy the company so he could shut down its coal operations and turn it into a renewable energy giant. He described his takeover bid as “the world’s biggest decarbonisation project”.


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