Fed Makes Much Anticipated 4th Consecutive 75 Basis Point Move, Bringing Fed Funds Rate to 3.75% to 4.00%, Refines Language
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Fed Makes Much Anticipated 4th Consecutive 75 Basis Point Move, Bringing Fed Funds Rate to 3.75% to 4.00%, Refines Language

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The Powell Fed has completed its November meeting with its sixth rate hike of 2022, bringing the Fed Funds rate to almost 4% for the first time in a generation. The Fed still isn’t finished with rate hikes as it moves late to get a handle on soaring inflation that has now permeated the US economy and shows no signs of moderating.

The Fed says that ongoing rate increases are appropriate, but that it will begin to assess the cumulative tightening of monetary policy. Even if the 75 basis point moves are over, it is very possible that we will see a further 50 basis point hike in December and one or two more hikes in 2023 before beginning to pivot.

For an economy that has grown addicted to a very cheap cost of capital, the Fed’s moves continue to be difficult to swallow, and that is why the Fed is now speaking about the cumulative impact of its actions. And, whatever the Fed's goals are, as the Fed gets closer and closer to its peak funds rate (what is now being referred to as a “terminal rate”), financial markets are breathing a sigh of relief.

It is worth emphasizing again that the Fed was late to react to clear signs of incipient inflation in 2020 and 2021, with Jerome Powell and Treasury Secretary Janet Yellen referring to pricing pressure as transient and insisting on holding the Fed funds rate at zero well into 2022 which further fed the inflation beast that they are now trying to tame.

It also bears repeating that nobody has seen inflationary pressures that are as acute as those we are now facing since the 1970s. While many financial analysts continue to believe that the terminal rate will be no higher that 5%, there continues to be a risk that the Fed may need to move much higher to get things under control, especially since Powell himself believes that the only precedent available to him is Fed Chair Paul Volcker’s actions in the 1970s.

Against that backdrop, I am frequently asked whether online savings rates make sense, given that the top rates lag below not only US Treasuries but short term brokered CDs. The answer is that they do until we have greater certainty that the Fed is nearing completion of the cycle. Going into today’s move, the top online savings rates were at or just over 3.50% APY, and it seems likely that they will go above 4% before the end of the year. The incremental gain in buying even a short brokered CD seems to be outweighed by the risk that we still haven’t priced in rates where we need to go to control inflation.

(Take it from me, I personally bought 2.65% 6-month brokered CDs less than three months ago, and am very glad that I acted in moderation!)

Bottom line: Continue to ride the wave by seeking the best online savings rates here.

Ari Socolow
Ari Socolow: Ari Socolow is the Chief Economist and Editor-in-Chief at BestCashCow. He is particularly interested in issues relating to bank transparency and the climate crisis. Since co-founding BestCashCow in 2005, Ari has been frequently cited in the media as an expert on local and national savings accounts, CD products, mortgage and loan products and credit card rewards products.

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