Fed matches year of hot inflation with feverish rate hikes

Traders work on the floor at the New York Stock Exchange as the Federal Reserve chairman Jerome Powell speaks after announcing a rate increase in New York on Nov. 2, 2022. The Federal Reserve is close to closing its most aggressive year of interest rate increases in at least three decades and Wall Street expects markets and the economy to feel the impact through 2023. (AP Photo/Seth Wenig, File)

NEW YORK (AP) — Wall Street expects the impact of the Federal Reserve's most aggressive year of interest rate hikes in at least three decades to continue to be felt through next year.

The central bank’s plan to fight stubbornly high prices on everything from food to clothing has been the central focus for Wall Street in 2022. The Fed’s benchmark rate currently stands at 3.75% to 4%, up from close to zero in March. That marks the sharpest rise since at least 1990 and the rate is expected to increase by another half-percentage point at the Fed’s final policy meeting in December. It could go higher than 5% in 2023.

As the economy bounced back from the virus pandemic, supply chains couldn’t keep up with demand. A spike in oil and gasoline prices earlier in the year added more fuel to inflation. The Fed has been very clear it will keep raising rates until it sees inflation cooling. That's made borrowing much more difficult and weighed heavily on stocks.

Companies with high valuations, especially technology firms, became less attractive as interest rate hikes made bond yields more lucrative. Major indexes have been extremely unsteady throughout the year as investors’ hopes for a Fed pivot to a less aggressive policy have been repeatedly dashed by more hot readings on inflation.

Analysts and economists have grown skeptical that the Fed will be able to tame inflation without stalling the economy into a recession.

“Recession looks more and more likely for the upcoming year and if the Fed responds accordingly, a recession may turn out to be short and shallow,” said Jeffrey Roach, chief economist for LPL Financial.

The bond market has been signaling that a recession is likely on the horizon. Low yields on long-term bonds are a sign that investors expect weakness in the economy.

The Fed has said that it may tone down the size of its rate hikes going into 2023, but that it might have to ultimately raise rates higher than expected to get inflation back under control.

Inflation was 7.7% in October compared to a year ago. While still extremely hot, it has been easing over the last few months.

Analysts expect that to continue, but the lag time between rate increases and their impact on inflation could mean a long road ahead for the Fed.

“Investors should prepare for further setbacks before positioning for a sustained turn in market sentiment,” said Mark Haefele, chief investment officer at UBS Global Wealth Management.