The Federal Reserve raised its benchmark interest rate by 0.75 percentage points for the third consecutive time and signaled its intention to maintain tight monetary policy as it seeks to curb overheating in the 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, carrying out its most aggressive monetary tightening campaign since the beginning of the years’ 80.
New projections from central bank policymakers showed that the benchmark rate rose to 4.4% by the end of this year before hitting a peak of 4.6% next year.
In a press conference after the rate hike, Jay Powell, chairman of the Fed, said the bank is likely to hold interest rates at a level that would hold back economic growth “for some time” and warned that doing so would damage growth and lead to higher unemployment.
“We will continue until we are sure that the job is done,” he added, echoing the language he used at the Jackson Hole Central Bankers Symposium last month, when he delivered his most aggressive message since he was nominated. at most Fed jobs.
In a statement, the FOMC said: “Inflation remains high, reflecting supply and demand imbalances linked to the pandemic, rising food and energy prices and wider price pressures.”
The committee, which said the rate hike was unanimously backed by policy makers, added that it “expects continued increases in the target range to be appropriate.”
The US central bank also released an updated “dot plot” that collects Fed officials’ individual interest rate projections through the end of 2025, which has reinforced their commitment to a “higher for longer” approach. . Projections pointed to further strong rate hikes this year and no cuts before 2024.
The median federal funds rate estimate by the end of the year jumped to 4.4%, suggesting another 0.75 percentage point rate hike this year before the Fed begins to scale back. Officials also expect the key official rate to peak at 4.6% in 2023 before falling to 3.9% in 2024. It is expected to drop further to 2.9% in 2025.
Those projections were significantly more hawkish than they were in June, the last time the dot plot was updated. At the time, officials predicted that the federal funds rate would reach just 3.4% by the end of the year and 3.8% in 2023, before declining in 2024.
At the time, the median estimate of the unemployment rate was 3.9 percent in 2023 and 4.1 percent in 2024.
Following the statement, US equities slid, with the S&P 500 and Nasdaq Composite down 0.5% and 0.7% respectively. The two-year Treasury yield, which moves with interest rate expectations, has reached a new high in 15 years. At the start of the day, for the first time since 2007, it exceeded 4%.
Bryan Whalen, TCW’s co-chief investment officer, said the Fed has “reiterated” its “hawkish message” and “completely eliminates[ed] every hope for a more accommodating message “.
“What comes out is the points for 2023 and the difference between the points and the market,” he said. “The Fed will hit 4.6% by 2023, while the market will have a cut of 0.5 percentage points by the end of the year.”
Officials on Wednesday more directly recognized the economic costs associated with their efforts to tackle inflation, seeing higher unemployment and lower growth.
Officials see the unemployment rate rise from its current 3.7% rate to 4.4% in 2023, where it is expected to remain for the entire following year. By 2025, the median estimate drops to 4.3%.
Over the same period, annual growth in gross domestic product is set to slow dramatically to 0.2% by the end of the year before registering a pace of 1.2% in 2023 as “core” inflation falls from the level. 4.5% forecast for the year – up to 3.1 per cent.
In July, the Fed’s preferred indicator, the Personal Consumer Spending Price Index, stood at 4.6%.
Growth is set to stabilize just below 2% in 2024 and 2025 as officials finally expect core inflation to approach the Fed’s 2% target range.
In June, policymakers predicted that as inflation approaches the Fed’s 2 percent target, growth would slow to just 1.7 percent. Most economists now expect the US economy to fall into a recession next year.
The September meeting marked an important moment for the Fed, which faced doubts this summer as to its determination to restore price stability after Fed Chairman Jay Powell suggested that the central bank was starting to worry about a excessive stiffening.