The Federal Reserve raised its benchmark interest rate by 0.75 percentage points for the third time in a row and indicated its intention to keep monetary policy tight while trying to put the brakes on the overheating US economy.
The Federal Open Market Committee raised the federal funds rate to a new target range of 3 percent to 3.25 percent after the two-day policy meeting, fueling the most aggressive monetary tightening campaign since the early 1980s.
New forecasts from central bank policy makers showed the benchmark interest rate rising to 4.4 per cent by the end of this year before peaking at 4.6 per cent next year.
At a news conference following the rate hike, Federal Reserve Chairman Jay Powell said the bank was likely to keep interest rates at a level limiting economic growth “for some time” and warned that doing so could hurt growth and lead to higher unemployment.
“We will continue it until we are confident that the job will be done,” he added, echoing the echo he used at the Jackson Hole Central Bank Governors Symposium last month, when he delivered his most hawkish message since his appointment to the top job. in the Federal Reserve.
In a statement, the Federal Open Market Committee said: “Inflation remained elevated, reflecting supply and demand imbalances related to the pandemic, rising food and energy prices, and broader price pressures.”
The committee, which said the rate hike was unanimously supported by policy makers, added that it “expects that continued increases in the target range will be appropriate”.
The US Central Bank He also published an updated “point chart” that compiles Fed officials’ individual interest rate forecasts through to the end of 2025, boosting commitment to a “higher for longer” approach. Expectations are for more interest rate hikes this year and no cuts before 2024.
The average estimate for the fed funds rate by the end of the year jumped to 4.4 percent, indicating another 0.75 percentage point rate increase in 2021 before the Fed began tapering. Officials also expected the key policy rate to peak at 4.6 percent in 2023 before declining to 3.9 percent in 2024. It is expected to decline further to 2.9 percent in 2025.
Those expectations were noticeably tighter than they were in June, the last time the point plot was updated. At the time, officials expected the federal funds rate to reach just 3.4 percent by the end of the year and 3.8 percent in 2023, before declining in 2024.
At the time, the average estimate of the unemployment rate was 3.9 percent in 2023 and 4.1 percent in 2024.
After the statement, US stocks initially fell before recovering during Powell’s press conference. The S&P 500 and Nasdaq Composite were up 0.7 percent and 1 percent, respectively.
In choppy trading, the 2-year Treasury yield, which moves in line with interest rate expectations, was slightly higher on the day, hovering below the 15-year high of 4.1 percent hit right after the Fed statement.
Brian Wallen, chief investment officer at TCW, said the Fed had “repeated” its “hard-line message” and “totally scrapped”.[ed] Any hope of a more pessimistic message.”
“What jumps out are the points for 2023 and the difference between the points and the market,” he said. “The Fed will reach 4.6 percent through 2023, while the market has cut 0.5 percentage points by the end of the year.”
Officials on Wednesday acknowledged more directly the economic costs associated with their efforts to tackle inflation, which has led to higher unemployment and lower growth.
Officials see the unemployment rate rising from its current rate of 3.7 percent to 4.4 percent in 2023, when it is expected to continue through the end of 2024. By 2025, the average estimate is down to 4.3 percent.
During the same period, annual GDP growth is set to slow significantly to 0.2 per cent by the end of the year before hitting a pace of 1.2 per cent in 2023 as “core” inflation declines from the 4.5 per cent level projected for this year – up to 3.1 percent.
As of July, the Fed’s preferred measure, the core PCE price index, was flat at 4.6 percent.
Growth is set to stabilize near 2 percent in 2024 and 2025, when officials finally expect core inflation to approach the Fed’s 2 percent target range.
In June, policymakers predicted that as inflation neared the Fed’s 2 percent target, growth would slow to just 1.7 percent. Most economists now expect the US economy to head into a recession next year.
The September meeting marks an important turning point for the Federal Reserve, which this summer faced questions about its intention to restore price stability after Fed Chairman Jay Powell indicated the central bank was beginning to worry about over-tightening.
