Fed Raises Interest Rates by 0.75 Percentage Point for Third Straight Meeting

 

Fed Raises Interest Rates by 0.75 Percentage Point for Third Straight Meeting

For the third time in a row, the Federal Reserve increased its benchmark interest rate by 0.75 percentage points and announced that it will maintain its strict monetary policy in an effort to cool the US economy's rapid expansion.

After its two-day policy meeting, the Federal Open Market Committee increased the federal funds rate to a new target range of 3 percent to 3.25 percent, launching its most aggressive monetary tightening drive since the early 1980s.

According to updated forecasts made by central bank policymakers, the benchmark interest rate would increase to 4.4 percent by the end of this year before peaking at 4.6 percent the following year.

Following the rate hike, Fed Chair Jay Powell stated in a news conference that the bank would likely maintain interest rates at a level that restrains economic development "for some time" and cautioned that doing so would damage growth and lead to increased unemployment.

"No one knows if this process will lead to a recession," he added when asked about the harm that rate increases would have to the economy.

Powell said, repeating rhetoric he used at the Jackson Hole conference of central bankers last month, when he gave his most hawkish speech since being named to the top position at the Fed. "We will remain at it until we're certain the work is done," Powell said.

"Inflation is elevated," the FOMC stated in a statement, "reflecting supply and demand imbalances associated to the pandemic, increased food and energy costs, and broader pricing pressures."

The committee stated that it "anticipates that continued increases in the target range will be reasonable" after claiming that policymakers had unanimously backed the rate increase.

The median projection for the fed funds rate by year's end increased to 4.4%, indicating a further rate increase of 0.75 percentage points in 2022 before the Fed begins to slow its rate increases. The main policy rate is expected to peak at 4.6% in 2023 before falling to 3.9% in 2024, according to officials. It is anticipated to fall much further, to 2.9% in 2025.

Compared to the previous time the dot plot was revised in June, those estimates were noticeably more pessimistic. At the time, authorities expected the fed funds rate would peak at only 3.4% by year's end, then drop to 3.8% in 2023 before rising again in 2024.

The consensus projection for the unemployment rate at the time was 3.9% in 2023 and 4.1% in 2024.

Following Powell's remarks, the US financial markets fell, with equities giving up an earlier gain. The benchmark S&P 500 fell 1.4%, on pace for its second straight day of losses, while the heavily weighted Nasdaq Composite fell 1.5%.

The two-year Treasury yield, which is influenced by expectations for interest rates, rose to a 15-year high of 4.1% just after the Fed announced its announcement amid choppy trade.

The Fed has "reiterated" its "hawkish message," according to Bryan Whalen, co-chief investment officer at TCW, and "totally eliminated any prospect for a more dovish approach."

The dots for 2023 and the discrepancy between them and the market, he continued, "pop out." "The Fed will reach 4.6% until 2023, whereas the market will see a 0.5 percentage point decrease by year's end."

Indicating increased unemployment and slower growth, officials on Wednesday were more open about the financial implications of their fight against inflation.