The Federal Reserve raised its benchmark interest rate by 0.75 percentage points for the third time in a row and signaled its intention to keep monetary policy tight as it tries to slow down the growing US economy. hot.
The Federal Open Market Committee raised the federal funds rate to a new target range from 3% to 3.25% after a two-day policy meeting, prompting the most aggressive monetary tightening campaign since. since the early 1980s.
New projections from central bank policymakers suggest the benchmark rate will rise to 4.4% by the end of the year before peaking at 4.6% next year.
In a press conference after the rate hike, Jay Powell, Fed Chairman, said the bank would likely keep interest rates at a level where they stifle economic growth “for a while” and warned against doing so. will hurt growth and lead to higher unemployment.
“We will hold it until we are confident that the job is done,” he added, echoing the language he used at the Jackson Hole symposium of central bankers. last month, when he delivered his most hawkish message since he was appointed to the top post. at the Fed.
In a statement, the FOMC said: “Inflation remains high, reflecting pandemic-related supply and demand imbalances, higher food and energy prices, and broader price pressures.”
The committee said a rate hike was unanimously supported by policymakers, adding that it “anticipates that continued increases within the target range would be appropriate”.
The Central Bank of the United States of America also published an updated “dot chart” that includes Fed officials’ individual rate projections through the end of 2025, which underpins pledge to a “higher in the long run” approach. Forecasts suggest an even bigger rate hike this year and no cuts before 2024.
The median estimate for lending rates at year-end rose to 4.4%, suggesting another 0.75 percentage point rate hike in 2021 before the Fed begins scaling back. Officials also forecast the primary policy rate will peak at 4.6% in 2023 before falling to 3.9% in 2024. The rate is expected to drop to 2.9% in 2025. .
Those predictions have been significantly more hawkish than they were in June, when the last time the plot ended was update. At the time, officials predicted lending rates would hit just 3.4% year-end and 3.8% in 2023, before falling in 2024.
At the time, the median estimate for the unemployment rate was 3.9% in 2023 and 4.1% in 2024.
After the announcement, US stocks fell, with the S&P 500 and Nasdaq Composite falling 0.5% and 0.7% respectively. Yields on two-year Treasuries, which vary with interest rate expectations, hit a 15-year high. Earlier in the day, it broke through 4% for the first time since 2007.
Bryan Whalen, co-chief investment officer at TCW, said the Fed had “repeat” its “hawkish message” and “totally dismiss it.”[ed] any hope for a more dovish message”.
“What emerges is the dots for 2023 and the difference between the dots and the market,” he said. “The Fed will increase it to 4.6% through 2023, while the market cuts 0.5 percentage points by the end of the year.”
Officials on Wednesday directly acknowledged the economic costs associated with trying to tackle inflation, leading to higher unemployment and lower growth.
Officials expect the unemployment rate to rise from the current rate of 3.7% to 4.4% in 2023, which is expected to remain until the end of 2024. By 2025, the median estimate is down. down to 4.3%.
Year-on-year, annual gross domestic product growth is expected to slow significantly to 0.2% year-end before reaching a 1.2% pace in 2023 as core inflation slows. from 4.5% forecast for the year. -Send up to 3.1 percent.
As of July, the Fed’s preferred measure, the core personal consumption expenditures price index, stood at 4.6%.
Growth is set to stabilize at just 2% in 2024 and 2025, when officials finally expect core inflation to move closer to the Fed’s 2% target range.
In June, policymakers predicted that as inflation falls near the Fed’s 2% target, growth will slow to just 1.7%. Most economists now expect the US economy to shrink next year.
The September meeting marks a pivotal moment for the Fed, which faces questions this summer about its determination to restore price stability after Fed chair Jay Powell suggested the central bank start to worry about over-tightening.