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 curb an overheating US economy.
The Federal Open Market Committee raised the federal funds rate to a new target range of 3% to 3.25% after its two-day policy meeting, advancing its most aggressive monetary tightening campaign since early of the eighties.
New projections from central bank policymakers showed the benchmark rate rising to 4.4% by the end of this year before peaking at 4.6% next year.
In a news conference after the rate hike, Fed Chairman Jay Powell said the bank would likely keep interest rates at a level that would slow economic growth “for some time” and warned that doing so would hurt growth and lead to higher unemployment.
Asked about the damage the rate hike would inflict on the economy, he said: “Nobody knows if this process will lead to a recession.”
“We’ll keep at it until we’re sure the job is done,” Powell added, echoing language he used at the central bankers’ symposium in Jackson Hole last month, when he delivered his most hawkish message since be appointed to occupy the first place. to the Fed.
In a statement, the FOMC said: “Inflation remains elevated, reflecting pandemic-related supply and demand imbalances, higher food and energy prices, and broader price pressures.”
The committee, which said the rate increase received unanimous support from policymakers, added that it “anticipates that continued increases in the target range will be appropriate.”
The U.S. central bank also released an updated “dot chart” compiling Fed officials’ individual interest rate projections through the end of 2025, which reinforced its commitment to a “higher to more time”. Projections called for major further rate hikes this year and no cuts before 2024.
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The median estimate for the year-end fed funds rate rose to 4.4%, suggesting another 0.75 percentage point rate hike in 2022 before the Fed begins tapering . Officials also forecast the main policy rate to peak at 4.6% in 2023 before easing to 3.9% in 2024. It is expected to drop further to 2.9% in 2025.
Those projections were significantly more specific than in June, the last time the dot chart was updated. At the time, officials predicted the fed funds rate would reach just 3.4 percent by the end of the year and 3.8 percent in 2023, before tapering in 2024.
At that time, the median estimate for the unemployment rate was 3.9% in 2023 and 4.1% in 2024.
After the statement, US stocks initially fell, before recovering during Powell’s press conference. The S&P 500 and Nasdaq Composite rose 0.7% and 1%, respectively.
In volatile trading, the two-year Treasury yield, which moves with interest rate expectations, was slightly higher on the day, just below a 15-year high of 4.1 percent that reached immediately after the Fed statement.
TCW co-chief investment officer Bryan Whalen said the Fed had “reiterated” its “hawkish message” and “completely removed[ed] any hope of a more conciliatory message”.
“What jumps out is the points for 2023 and the difference between the points and the market,” he said. “The Fed will hit 4.6 percent through 2023, while the market sees a 0.5 percentage point cut by the end of the year.”
On Wednesday, officials more directly acknowledged the economic costs associated with their efforts to tackle inflation, with rising unemployment and lower growth.
Officials see the unemployment rate rising from its current rate of 3.7 percent to 4.4 percent in 2023, where it is expected to remain until the end of 2024. In 2025, the median estimate drops to 4.3%
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Over the same period, annual gross domestic product growth will slow sharply to 0.2% by the end of the year before registering a pace of 1.2% in 2023 as “core” inflation falls from level of 4.5% planned for the year. – up to 3.1 percent.
In July, the Fed’s preferred gauge, the core personal consumption expenditure price index, stood at 4.6 percent.
Growth is expected to gradually stabilize around 2% in 2024 and 2025, when officials finally expect core inflation to move closer to the Fed’s 2% target range.
In June, policymakers projected that as inflation moved closer to the Fed’s 2% target, growth would slow to just 1.7%. Most economists expect the US economy to slip into recession next year.
The September meeting marked an important moment for the Fed, which has faced questions this summer about its decision to restore price stability after Powell suggested the central bank was beginning to worry about a excessive hardening.