The Federal Reserve raised benchmark interest rates by another three-quarters of a percentage point on Wednesday and said it will continue to rise well above current levels.
In its efforts to push inflation to near its highest level since the early 1980s, the central bank has raised its Federal Funds interest rate to a range of 3%-3.25%, the highest since early 2008, after the third consecutive 0.75 percentage point move.
Shares skyrocketed following the announcement, with the Dow Jones Industrial Average falling slightly most recently. The market fluctuated as Fed Chair Jerome Powell discussed the outlook for interest rates and the economy.
Traders were concerned that the Fed will remain aggressive for longer than some expected. Projections from the meeting indicated that the Fed expects to raise interest rates by at least 1.25 percentage points this year during the two remaining meetings.
‘Main message hasn’t changed’
“My key message hasn’t changed since Jackson Hole,” Powell said in his post-meeting press conference, referring to his policy speech at the Fed’s annual symposium in Wyoming in August. “The FOMC is committed to bringing inflation down to 2%, and we’ll keep going until the job is done.”
The gains that started in March – and from near zero – mark the most aggressive tightening by the Fed since it began using overnight interest rates as its main policy tool in 1990. The only comparison was in 1994, when the Fed totaled 2.25 percentage points; it would start cutting rates in July of the following year.
Along with the massive rate hikes, Fed officials indicated an intent to continue the hike until the fund level hits a “closing rate” or end point of 4.6% in 2023. That implies a quarter-point rate hike next year, but no cuts. .
The “dot plot” of individual members’ expectations does not point to rate cuts until 2024. Powell and his colleagues have stressed in recent weeks that it is unlikely to see any rate cuts next year, as the market had set prices.
Members of the Federal Open Market Committee say they expect the rate hikes to have consequences. The interest at first glance refers to the rates banks charge each other for overnight loans, but it also spills over into many consumer adjustable-rate debt instruments, such as mortgages, credit cards, and auto financing.
In their quarterly updates of estimates for rates and economic data, officials converged on expectations that the unemployment rate would rise to 4.4% from the current 3.7% next year. Increases of that magnitude are often accompanied by recessions.
In addition, they see GDP growth slowing to 0.2% for 2022, rising slightly in subsequent years to a long-term rate of just 1.8%. The revised forecast is a sharp cut from the June estimate of 1.7% and comes after two consecutive quarters of negative growth, a widely accepted definition of recession.
Powell admitted that a recession is possible, especially if the Fed has to continue to tighten aggressively.
“Nobody knows if this process will lead to a recession and, if so, how big that recession will be,” he said.
The increases also come with hopes that headline inflation will fall to 5.4% this year, as measured by the Fed’s preferred personal consumer spending price index, which showed inflation of 6.3% in July. to see. The summary of the economic projections then shows that inflation will fall back to the Fed’s 2% target by 2025.
Core inflation excluding food and energy is expected to fall to 4.5% this year, little changed from its current level of 4.6%, before falling to 2.1% by 2025. (The PCE value is well below the consumer price index.)
The slump in economic growth came, though the FOMC statement was massaged by language that had described spending and production as “softened” in July. The statement from this meeting noted, “Recent indicators point to modest growth in spending and output.” Those were the only changes to a statement that were unanimously approved.
Otherwise, the statement continued to describe job growth as “robust” and noted that “inflation remains high”. It also reiterated that “continued increases in the target rate will be appropriate.”
’75 is the new 25′
The dot plot showed virtually all members on board with the higher near-term rates, although there were some variations in subsequent years. Six of the 19 “points” were in favor of moving it to a range of 4.75%-5% next year, but the central trend was to 4.6%, pushing rates in the 4.5%-4 range. .75% would bring. The Fed is targeting a fund rate in quarter-point margins.
The chart pointed to as many as three rate cuts in 2024 and another four in 2025, to push interest rates back to a median outlook of 2.9% over the longer term.
Markets are bracing for a more aggressive Fed.
“I believe 75 is the new 25 until something breaks, and nothing’s broken yet,” said Bill Zox, portfolio manager at Brandywine Global, of the magnitude of the rate hikes. “The Fed is nowhere near a break or a pivot. They are laser focused on breaking inflation. An important question is what else can they break.”
Traders had fully priced in the 0.75 percentage point move and had even assigned an 18% chance of a full percentage point gain, according to data from the CME Group. Futures contracts just before Wednesday’s meeting implied a fund rate of 4.545% by April 2023.
The measures come amid stubbornly high inflation that Powell and his colleagues dismissed as “transient” for much of last year. Officials admitted in March this year, with a quarter-point increase, the first increase since rates were cut to zero in the early days of the Covid pandemic.
Along with the rate hikes, the Fed has reduced the amount of bonds it has built up over the years. September marked the beginning of “quantitative tightening,” as it is known in the markets, with up to $95 billion in maturing bond yields allowed to roll off the $8.9 trillion Fed balance sheet.