Fed raises interest rates by 0.25%, Powell acknowledges ‘disinflation’

Yahoo Finance Live anchors discuss the top takeaways from the Federal Reserve's policy statement and press conference on Wednesday.

Video transcript

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- So let's set the scene with the action from the Fed yesterday and what it means for you.

JEROME POWELL: At today's meeting, the committee raised the target range for the federal funds rate by 25 basis points, bringing the target range to 4.5% to 4.75%.

- The Federal Reserve is raising its benchmark interest rate by a quarter point, putting it in the range of 4.5% to 4.75%. The decision was widely expected by economists. And it's a step down from recent increases, since inflation is starting to slow and the Fed has decided it doesn't need to be as aggressive. But just because the Fed's tapping the brakes, that doesn't mean it has plans to pause rate increases any time soon.

JEROME POWELL: We continue to anticipate that ongoing increases in the target range for the federal funds rate will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2%.

- Today's announcement will have an impact on the US economy and your bank account. First, the Federal Reserve's interest rate policy is tied to borrowing rates and made big waves in the housing market in 2022. Higher mortgage rates means higher monthly payments for people buying homes now. And since the Central Bank began lifting rates from its pandemic era low, mortgage applications have seen a steep decline, plunging 40% in the last year.

Second, you may have noticed you're earning more money in your savings account. That's because rising interest rates push up yields for savers, with some high-yield accounts now earning more than 3.5% annually. And last but not least is the Fed's ongoing battle against rising inflation, Chairman Powell reiterating the central bank will do everything in its power to fight rising costs, saying it won't stop until inflation is subdued. That'll be a relief if and when it works. In the meantime, the Fed's hikes are rippling their way through the economy and your wallet.

- So that brings us to thing number one today, the disinflationary trend and what it means for markets. So can the Fed actually achieve a soft landing? Of course, we've said it time and time again, dual mandate for the Fed, maximum employment, but at the same time, price stability. They are prioritizing that price stability, even as we get a wave of employment data this week that actually seems to give them a little bit more, actually, cushion for their understanding right now, or at least their pathway forward right now, Soz.

- Yeah, I do want to point out, though, I know the market was really enthused. We saw that reversal as that press conference by Jay Powell took hold. I just want to remind investors out there that this doesn't mean that we're seeing deflation. That is not the same as disinflation. That's the first thing. Next thing, I don't think the Fed Chair said or pivoted to that we are getting rate cuts at some point this year. What he essentially said, they may not be raising rates anymore past that March meeting. So that's a good thing as well.

And also let's keep in mind, while focusing on what this all means to people's money, is that rates are still going to be high. There's likely another rate hike coming. And this is still a Fed that is trying to slow the economy down. What does that mean? It will cost more still to buy a car, to buy a home, and to do a lot of projects around the house that you might have planned for. So again, this isn't a Fed cutting rates. It's just the Fed maybe being a little less hawkish and the stocks embracing them.

- Yeah, I mean, trying to boil down a very complex issue and all of the ripple effects that a Fed rate increase has, but just to further explain what we're talking about, there's inflation, there's deflation, then there's disinflation. Inflation is when prices are going up. Deflation is when prices are going down. Disinflation is when prices are going up at a slower pace.

So say if year over year inflation goes from 6% to 2%, that is disinflation. And that is what the Federal Reserve wants to have happen. So essentially, what Fed Chair Jay Powell was doing was acknowledging that yes, there is some disinflation, whether it's directly because the Fed is raising rates, and that's having an effect, or also because of the supply chain effects have been abating.

So yes, maybe your car is more expensive, although some of the car prices have been coming down, as we well know, Soz. So it doesn't mean that you're going to be paying more for everything. It means things are going to be more spotty this year. And then of course, there are the implications for the market, which is a whole other ball of wax.

And now certainly we see and we certainly saw in the reaction yesterday that you were pointing out, Brad, that investors are now looking beyond this interest rate increase cycle to the yen. Maybe they're a little bit more hopeful that there's not going to be an outright recession and maybe not a severe one. And that's where some of this optimism is all coming from.

- And perhaps on the mindset of the consumer too, they might be thinking about where wages may stay elevated in order to offset some of the price inflation that they've already incurred right now too. We saw that in the ADP data and then additionally thinking out to the jobs report data.

Keep a close eye on the wage growth figure that we've continued to bring to your attention here, and within the most recent report, yeah, 4.6%, but continuing to think about where you're seeing some of that job migration in post the great resignation era, now looking at some of the layoffs that have come forward, some of the hiring freezes that have been initiated for employees that are-- or prospective employees that are still looking for jobs.

There's still a multiple of roughly two for them to figure out what kind of job they want in the economy and then ultimately still be able to make sure that their wages that they're taking in are elevated and offsetting the pace of inflation that they had seen and then the disinflation as well, perhaps, that they're expecting to continue at this point.