Rates raised by three-quarters of a percentage point

The Fed raises rates 75 basis points to fight inflation

The Federal Reserve on Wednesday high benchmark interest rates by another three-quarters of a percentage point and indicated that it will continue to rise well above the current level.

In its quest to reduce inflation, which is near its highest levels since the early 1980s, the central bank raised its federal funds rate to a range of 3%-3.25%, the highest since early 2008, after the third consecutive 0.75. percentage point movement.

The shares ranged following the announcement, with the Dow Jones Industrial Average most recently dipping slightly. Market rocked as Fed chairman Jerome Powell discussed the outlook for interest rates and the economy.

Traders are concerned that the Federal Reserve will remain more aggressive for longer than some had anticipated. Projections from the meeting indicated that the Fed expects to raise rates by at least 1.25 percentage points at its two remaining meetings this year.

‘The main message has not changed’

“My main message hasn’t changed since Jackson Hole,” Powell said in his post-meeting news conference, referring to his policy speech at the Fed’s annual symposium in August in Wyoming. “The FOMC is fully committed to bringing inflation down to 2%, and we will continue to do so until the job is done.”

The increases that began in March, and from a point close to zero, mark the Fed’s most aggressive tightening since it began using the overnight funds rate as its main policy tool in 1990. The only comparison was in 1994. , when the Fed raised a total of 2.25 percentage points; would start cutting rates in July of the following year.

Along with the massive rate increases, Fed officials noted intend to keep rising until the funds level reaches a “terminal rate,” or end point, of 4.6% in 2023. That implies a quarter-point rate increase next year, but no decreases .

the “dot plot” of individual member expectations it does not point to rate cuts until 2024. Powell and his colleagues have emphasized in recent weeks that rate cuts are unlikely to happen next year, as the market has been pricing in.

Members of the Federal Open Market Committee indicate that they expect rate hikes to have consequences. The sight funds rate refers to the rates that banks charge each other for overnight loans, but filters through many consumer adjustable rate debt instrumentssuch 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 its current 3.7%. Increases of this magnitude are often accompanied by recessions.

Along with that, they see GDP growth slowing to 0.2% by 2022, rising slightly in subsequent years to a longer-term rate of just 1.8%. The revised forecast is a sharp cut from the 1.7% estimate in June and comes after two consecutive quarters of negative growth, a commonly accepted definition of a recession.

Powell admitted that a recession is possible, particularly if the Fed has to continue to tighten aggressively.

“No one knows whether this process will lead to a recession or, if so, how significant that recession will be,” he said.

The increases also come on the hope 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 receding to the Fed’s 2% target for 2025.

Core inflation excluding food and energy is expected to ease to 4.5% this year, little changed from the current level of 4.6%, before eventually falling to 2.1% by 2025. (The PCE reading has been well below the consumer price index).

The slowdown in economic growth came despite the FOMC statement massaging language that in July had described spending and output as having “softened.” The statement from this meeting noted: “Recent indicators point to modest growth in spending and output.” Those were the only changes in a statement that received unanimous approval.

Otherwise, the statement went on to describe job gains as “robust” and noted that “inflation remains elevated.” He also reiterated that “continued increases in the target rate will be appropriate.”

’75 is the new 25′

The dot plot showed virtually all members on board with the highest rates in the short term, although there was some variation in subsequent years. Six of the 19 “points” were in favor of taking rates to a range of 4.75%-5% next year, but the central tendency was 4.6%, which would put rates in the 4 zone. .5%-4.75%. The Federal Reserve targets its interest rate in quarter-point ranges.

The chart indicated up to three rate cuts in 2024 and four more in 2025, to bring the long-term funds rate down to a median outlook of 2.9%.

Markets have been bracing for a more aggressive Fed.

“I think 75 is the new 25 until something breaks, and nothing has broken yet,” said Bill Zox, portfolio manager at Brandywine Global, referring to the size of rate hikes. “The Fed is nowhere near a pause or a pivot. They are laser focused on breaking inflation. A key question is what else they might break.”

Traders had fully priced in the 0.75 percentage point move and had even assigned an 18% chance of a total percentage point increase, according to data from CME Group. Futures contracts just before Wednesday’s meeting implied a 4.545% funds rate for April 2023.

The moves come amid stubbornly high inflation that Powell and his colleagues spent much of last year dismissing as “transient.” Officials relented in March this year, with a quarter-point increase that was the first increase since they took rates to zero in the early days of the covid pandemic.

Along with the rate hikes, the Fed has been reducing the amount of bond holdings it has accumulated over the years. September ushered in a full-throttle “quantitative tightening,” as it’s known in the markets, with as much as $95 billion a month in proceeds from maturing bonds potentially coming off the $8.9 trillion balance sheet. of the Federal Reserve.

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