The Federal Reserve raised benchmark interest rates an additional three-quarters of a percentage point on Wednesday and signaled it would continue to climb well above the current level.
In its quest to bring inflation down to near its highest levels since the early 1980s, the central bank raised its federal funds rate to a range of 3% to 3.25%, the highest since the beginning of 2008, after the third consecutive rate of 0.75. percentage point movement.
Shares tumbled after the announcement, with the Dow Jones Industrial Average recently rising 280 points. The market pared its losses as Fed Chairman Jerome Powell discussed the outlook for interest rates and the economy.
Traders fear the Fed will remain more hawkish for longer than some expected. Projections from the meeting indicated that the Fed expects to raise rates by at least 1.25 percentage points in its two remaining meetings this year.
“My main 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 August. “The FOMC is firmly committed to bringing inflation down to 2%, and we will continue until the job is done.”
The increases that began in March and from near zero mark the Fed’s most aggressive tightening since it began using the overnight rate as its primary policy tool in 1990. only comparison dates back to 1994, when the Fed raised a total of 2.25 percentage points; it would begin cutting rates in July of the following year.
Along with the massive rate hikes, Fed officials have signaled their intention to keep rising until the level of funds reaches a “terminal rate,” or endpoint, of 4.6% in 2023. This implies a quarter-point rate hike next year, but no cut. .
The “dot chart” of individual members’ expectations does not point to rate cuts until 2024. Fed Chairman Jerome Powell and his colleagues have stressed in recent weeks that rate cuts are unlikely happen next year because the market had set the prices.
Members of the Federal Open Market Committee say they expect the rate hikes to have consequences. On the face of it, the funds rate matches the rates banks charge each other for overnight loans, but it carries over to many adjustable-rate debt securities, such as home equity loans, credit cards and car financing.
In their quarterly updates of rate estimates and economic data, officials coalesced around expectations that the jobless rate will rise to 4.4% next year from 3.7% currently. Increases of this magnitude are often accompanied by recessions.
Along with this, they see GDP growth slowing to 0.2% for 2022, rising slightly in subsequent years to a longer-term rate of just 1.8%. The revised forecast is down sharply from the 1.7% estimate in June and follows two consecutive quarters of negative growth, a commonly accepted definition of a recession.
Powell conceded that a recession is possible, particularly if the Fed is to continue to tighten aggressively.
“No one knows if this process will lead to a recession or, if so, how big that recession will be,” he said.
The increases also come with hopes that headline inflation will ease to 5.4% this year, as measured by the Fed’s preferred personal consumption expenditures price index, which showed inflation at 6. .3% in July. The summary of economic projections then sees inflation falling back below the Fed’s 2% target by 2025.
Core inflation excluding food and energy is expected to decline to 4.5% this year, little change from the current level of 4.6%, before eventually falling to 2.1% by 2025. PCE reading is well below the consumer price index.)
The reduction in economic growth came even as the FOMC statement massaged language that in July had described spending and production as having “softened”. The statement from that meeting noted, “Recent indicators point to modest growth in spending and output.” These are the only changes in a statement that received unanimous approval.
Otherwise, the statement continued to describe the jobs gains as “robust” and noted that “inflation remains high.” The statement also noted again that “continued increases in the target rate will be appropriate.”
The dot chart showed virtually all members on board with the highest short-term rates, although there was some variation over the following years. Six of the 19 “points” were in favor of taking rates to a range of 4.75% to 5% next year, but the central tendency was at 4.6%, which would put rates in the zone of 4 .5% to 4.75%. The Fed is targeting its funds rate in quarter-point ranges.
The chart shows up to three rate cuts in 2024 and four more in 2025, to bring the long-term funds rate back to a median outlook of 2.9%.
Markets brace for a more aggressive Fed.
“I believe 75 is the new 25 until something breaks, and nothing has broken yet,” said Bill Zox, portfolio manager at Brandywine Global, in reference to the scale of the rises. rate. “The Fed is not close to a break or a pivot. It is focused on breaking inflation. A key question is what else could it break.”
Traders had fully priced the 0.75 percentage point move and even assigned an 18% chance of a full 1 percentage point move, according to data from CME Group. Futures just before Wednesday’s meeting implied a funds rate of 4.545% by April 2023.
These measures come against a backdrop of stubbornly high inflation that Powell and his colleagues have spent much of the last year calling “transitional.” Officials caved in March this year, with a quarter-point hike that was the first increase since rates were zeroed at the start of the Covid pandemic.
Along with the rate hikes, the Fed has reduced the amount of bond holdings it has accumulated over the years. September marked the start of high-speed “quantitative tightening” as it is known in the markets, with up to $95 billion a month of proceeds from maturing bonds allowed to roll off the 8,900 balance sheet. billion dollars from the Fed.