The US Federal Reserve has raised its benchmark policy rate by 0.75 percentage points for the fourth consecutive time this year in its battle against higher consumer prices.
The sixth rate hike in 2022 will further increase mortgage rates and debt servicing costs for consumers in Cayman, as banks price flexible rate loans as a percentage above the federal funds rate and thus tend to pass on rate increases to local borrowers.
The Federal Open Market Committee (FOMC) lifted the federal funds rate to a target range of 3.75% to 4% on Wednesday.
The US central bank’s attempts to lower inflation with a more aggressive monetary tightening have so far not had the desired effect.
Despite a slowing housing market, as US mortgage rates started to exceed 7%, and signs of slowing consumer demand, inflation figures have remained stubbornly high.
The annual US inflation rate of 8.2% for the 12 months ending in September was only marginally lower than in August (8.3%) and July (8.5%). Meanwhile, in the Cayman Islands inflation topped 12.1% in the second quarter.
In a statement, the FOMC said recent indicators pointed to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. But inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.
Future rate hikes expected
The Committee said it anticipates ongoing rate increases will restrict monetary policy sufficiently for inflation to come down to 2% over time.
Economists have warned that the aggressive pace of rate hikes could stifle economic activity more than necessary and lead to a recession, given the time it takes for interest rate measures to show an effect in the economy.
The Committee said it would take this lag and the cumulative tightening into account in future rate decisions. This has been interpreted by some as an indication that interest rate rises are going to slow to a 0.5 percentage point increase at the next meeting in December.
Federal Reserve Chairman Jerome Powell said at a press conference in Washington on Wednesday, “Restoring price stability will likely require maintaining a restrictive stance of policy for some time.”
He said the longer the current bout of high inflation continues, the greater the chance that expectations of higher inflation will become entrenched.
While at some point it will become appropriate to slow the pace of increases, when an appropriate level of interest rates has been reached to bring inflation down, Powell said, “we still have some ways to go”.
He said incoming data since the FOMC’s September meeting suggests that the ultimate level of interest rates will be higher than previously expected.
Interest rate hikes by the Fed so far this year:
- 17 March: 0.25 percentage point
- 5 May: 0.50 percentage point
- 16 June: 0.75 percentage point
- 28 July: 0.75 percentage point
- 22 September: 0.75 percentage point
- 2 November: 0.75 percentage point
Local rates to go up
As a result of the rate increase, the prime rates for residential mortgages, consumer loans and corporate loans in Cayman are going to go up.
The federal funds rate is the rate at which US banks borrow and lend to one another overnight.
In the US and the Cayman Islands, variable interest loans and mortgages are typically pegged to the Fed Funds rate and priced as a margin on top of that rate.
Any US interest rate increase therefore translates into higher loan interest and savings rates in Cayman for many financial products.
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