Rate cuts are not foreseen until 2024
Federal Reserve Chair Jerome Powell said officials were “strongly committed” to curbing inflation after they raised interest rates by 75 basis points for a third straight time and signalled more hikes are coming.
“We are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to two per cent,” he told a press conference in Washington on Wednesday after officials lifted the target range for the benchmark federal funds rate to a range of three per cent to 3.25 per cent — the highest since before the 2008 financial crisis, and up from near zero at the start of this year.
Officials forecast that rates would reach 4.4 per cent by the end of this year and 4.6 per cent in 2023, a more hawkish shift in their so-called dot plot than expected. That implies a fourth-straight 75 basis-point hike could be on the table for the next gathering in November, about a week before the U.S. midterm elections.
Powell said his main message was that officials were “strongly resolved” to bring inflation down to the Fed’s two per cent goal and added that “we will keep at it until the job is done.” The phrase invoked the title of former Fed chief Paul Volcker’s memoir “Keeping at It.”
Policy makers now expect the key rate to rise to 4.4 per cent by year end and 4.6 per cent during 2023, according to the median estimate in updated quarterly projections published alongside the statement.
Further ahead, rates were seen stepping down to 3.9 per cent in 2024 and 2.9 per cent in 2025.
The policy-sensitive two-year Treasury yield surged, jumping above the four per cent level. Meanwhile the S&P 500 index plunged — reversing early day gains — and the dollar index hit a new record high.
Swaps traders boosted where they now see the funds rate ending the year to about 4.31 per cent, from around 4.22 per cent before the FOMC meeting wrapped.
The projections, which showed a steeper rate path than officials laid out in June, underscore the Fed’s resolve to cool inflation despite the risk that surging borrowing costs could tip the U.S. into recession.
Powell and his colleagues, slammed for a slow initial response to escalating price pressures, have pivoted aggressively to catch up and are now delivering the most aggressive policy tightening since the Fed under Volcker four decades ago.
The updated forecasts also showed unemployment rising to 4.4 per cent by the end of next year and the same at the end of 2024 — up from 3.9 per cent and 4.1 per cent, respectively, in the June projections.
Estimates for economic growth in 2023 were marked down to 1.2 per cent and 1.7 per cent in 2024, reflecting a bigger impact from tighter monetary policy.
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Inflation peaked at 9.1 per cent in June, as measured by the 12-month change in the U.S. consumer price index. But it’s failed to come down as quickly in recent months as Fed officials had hoped: In August, it was still 8.3 per cent.
Job growth, meanwhile, has remained robust and the unemployment rate, at 3.7 per cent, is still below levels most Fed officials consider to be sustainable in the longer run.
The failure of the labour market to soften has added to the impetus for a more-aggressive tightening path at the U.S. central bank.
Fed action is also taking place against the backdrop of tightening by other central banks to confront price pressures which have spiked around the globe. Collectively, about 90 have raised interest rates this year, and half of them have hiked by at least 75 basis points in one shot.