The Federal Reserve imposed the latest in a series of sharp interest rate hikes on Wednesday in a sign that policymakers aren’t backing down from an aggressive campaign to lower decades-high inflation.

The rate-making Federal Open Market Committee hiked the benchmark interest rate by 0.75 percentage points at the end of a two-day meeting. The latest increase moved the Fed’s target range to between 3% and 3.25%.

In a statement after the meeting, the FOMC said it “anticipates that ongoing increases in the target range will be appropriate” — an indication that the Fed isn’t done hiking interest rates.

“Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low,” the FOMC said. “Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.”

Fed officials have now hiked the benchmark rate by three-quarters of a percentage point for three consecutive meetings. The three-quarter-point hikes are the first of their kind since 1994 — an indication of the Fed’s urgent desire to bring prices lower.

Fed Chair Jerome Powell has indicated the central bank will keep hiking rates.
Fed Chair Jerome Powell has indicated the central bank will keep hiking rates.
AFP via Getty Images

Speaking a post-meeting press conference, Fed Chair Jerome Powell said the FOMC would hike its benchmark rate to a “restrictive level” and “keep it there for some time.” Current Fed projections call for a 4.25%-4.50% rate by the end of the year.

“My main message has not changed at all since Jackson Hole,” Powell said, referencing a hawkish speech he delivered at a Fed event last month.

“The FOMC is strongly resolved to bring inflation down to 2% and we will keep at it until the job is done,” he added.

The Fed signaled it expects inflation tracked in the personal consumption expenditure price index – its preferred gauge – to fall to 5.4% by the end of this year and reach its 2% target by 2025.

Powell acknowledged that the rate hikes had contributed to “declining activity of all different kinds” in the US housing market and were likely to cause “relatively modest” increases in unemployment.

The median projection among Fed officials showed an expectation that unemployment could rise to 4.4% by the end of 2023. As of August, the unemployment rate was 3.7%.

NYSE trader
Stocks have fallen steadily as the Fed tightens monetary policy.
Getty Images

The Fed would look for several key signs, including below-trend economic growth, better balance between supply and demand in the labor market and “compelling” evidence that inflation was falling, before considering a pivot.

Prior to the FOMC’s announcement, investors were pricing in an 82% probability of a three-quarter-percentage-point hike and an 18% probability of a full-point hike. Yields on two-year Treasury notes spiked above 4% on the expectation of another hike.

The Fed was widely expected to implement another sharp rate hike following a dismal August Consumer Price Index that renewed fears about persistent inflation. That’s despite mounting fears among investors that the Fed will be unable to achieve a “soft landing” and will instead tip the economy into a recession with its policy tightening.

Stocks have touched fresh lows in recent days as investors brace for an economic downturn.

The Fed’s benchmark interest has direct and indirect effects that ripple throughout the broader economy. Hikes impact credit card interest rates, savings accounts, auto loans and other forms of borrowing.

They also influence mortgage rates, which have surged above 6% for the first time since 2008 and have triggered a slowdown in the housing market.

Worried NYSE trader
Investors fear the Fed will tip the US economy into a recession.
Getty Images

Some critics, including billionaire Elon Musk and “Bond King” Jeffrey Gundlach, argue the Fed risks causing destructive deflation by continuing forward with rate hikes despite signs of a slowing economy.

“The Federal Reserve is likely tightening policy straight into the teeth of a recession. Many stock investors are hoping for a dovish pivot, but the stock market’s addiction to Fed easing when stocks decline may be what Jerome Powell is aiming to quash by aggressively hiking rates, in addition to inflation,” said Danielle DiMartino Booth, CEO and chief strategist of Quill Intelligence.

Prices rose by a hotter-than-expected 8.3% in August, while core inflation, a measure that excludes volatile food and energy prices, jumped by 6.3%. Inflation is much higher than the 2% range that the Fed and Treasury Department deem acceptable.

Federal Reserve
The Fed is under pressure to cool inflation.
Getty Images

The troubling federal data led some analysts to predict the Fed would implement a full-point hike for the first time in several decades.  

Even before the August CPI was released, top policymakers, including Fed Chair Jerome Powell, were indicating aggressive rate hikes were in store for the US economy.

During a speech earlier this month, Powell acknowledged the Fed was aware of the risk of “prematurely loosening policy.” He added the central bank was “strongly committed to this project and we will keep at it until the job his done.”

Powell has warned that hikes would continue even if it resulted in “some pain” for US households — including an increase in the national unemployment rate.

In a separate address, Fed Vice Chair Lael Brainard said officials were committed to tightened policy conditions “for as long as it takes to get inflation down.”



Source link

Author

Comments are closed.