“We believe the economy is very strong and will be able to withstand tighter monetary policy,” Powell said in March.
Slower growth and higher unemployment “are all painful to the public we serve, but they’re not as painful as failing to restore price stability and having to go back and do it again along the way,” Powell said.
Breakdown: The central bank hasn’t gone as hard as some investors thought it could. Some were bracing for the first peak hike in the Fed’s modern history. Still, hidden in the central bank’s projections were signs that it expects to remain strong, even if it means pushing the economy into rocky territory.
“The Fed has now entered the ‘danger zone’ in terms of the rate shocks they are launching on the US economy,” said Peter Boockvar, chief investment officer of Bleakley Financial Group.
The Fed’s prime interest rate is now set between 3% and 3.25%. Previously, its top policy makers had indicated that rates could rise to 3.4% by the end of this year, which would mean the bullish cycle is almost over.
Not anymore. The Fed is now setting rates of 4.4% by the end of the year, which implies more substantial increases in the coming months.
At the same time, the Fed revised its unemployment expectations upwards. It currently expects the unemployment rate to reach 4.4% in 2023, up from an estimate of 3.9% in June.
What it means: The Fed won’t back down, even if its strong medicine is hard for the US economy to swallow.
“Our view is that a Fed funds rate of 4% is the highest the economy would be able to handle and the Fed is clearly threatening to raise rates above that level,” Mark Haefele, chief investment UBS Global Wealth Management officer, told clients after the announcement.
It’s a message that could rebound markets in the coming weeks as Wall Street digest it.
US equities alternated between gains and losses on Wednesday before ending the day lower. The S&P 500 closed down 1.7%. The US dollar, meanwhile, continues its advance.
Paul Donovan, chief economist at UBS Global Wealth Management, told me that volatility is likely to persist because investors aren’t sure how the Fed is measuring its success. Furthermore, many factors driving up inflation numbers, such as the war in Ukraine and drought conditions, are beyond the control of the central bank.
“What will add to the uncertainty in the market is that the Fed is not saying what it is trying to do,” Donovan said. But what is recognizing that it could hurt.
Japan steps in to support the yen for the first time in 24 years
Japan tried to support the value of its currency on Thursday for the first time in 24 years by buying the yen to prevent it from weakening further against the US dollar.
“The government is concerned about these excessive fluctuations and has just taken decisive action,” Masato Kanda, Japan’s deputy finance minister for international affairs, told reporters Thursday after the rare move.
Asked by a reporter whether “decisive action” meant “market intervention”, Kanda replied in the affirmative.
Important context: Thursday’s decision marks the first time since 1998 that the Japanese government has intervened in the foreign exchange market by buying yen.
On Thursday, the Bank of Japan announced it would maintain its extremely accommodative monetary policy, signaling its determination to remain an outlier among G7 nations struggling to raise interest rates to tame inflation.
Why it matters: The action underscores the global effects of Fed policy and the US dollar’s soaring rally, which is pushing other currencies lower. This makes it more expensive for other countries to import food and fuel and increases the internal prices of fans. (More information below.)
Inflation in Japan has jumped above the Bank of Japan’s target, reaching the fastest annual pace in eight years.
The costs of high inflation are rising
Central banks are insisting that they will do whatever it takes to keep inflation in check. Meanwhile, leaders and politicians warn that failure is not an option.
“If we don’t reduce inflation, it will harm the most vulnerable, because an explosion in food and energy prices for the better off is a drawback – for the poor, a tragedy,” said Georgieva. “So let’s think of the poor first when we claim we are attacking inflation forcefully.”
Central banks “have no choice” but to raise interest rates in an effort to fight inflation, he added.
“The critical issue facing us is restoring the conditions for growth and price stability is a critical condition,” said Georgieva.
Big picture: Georgieva’s comments are reminiscent of the real-world consequences of the decisions that politicians are considering right now. But the rapid rise in interest rates could also cause global damage.
Even today: Initial US jobless claims for last week arrive at 8:30 am ET.
Coming tomorrow: A first look at the latest purchasing manager indices for the major economies will provide clues as to how they’re holding up.