Fed Offers Another Big Rate Hike; Powell vows to ‘carry on’

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  • The Fed raises its target interest rate to 3.00%-3.25%
  • Forecasts show another sharp rise likely by the end of the year
  • Powell: No ‘painless’ way to lower inflation

WASHINGTON, Sept 21 (Reuters) – Federal Reserve Chairman Jerome Powell vowed on Wednesday that he and fellow policymakers would “continue” their fight against inflation as the U.S. central bank raised interest rates by three quarters of a percentage point. for the third time in a row and signaled that borrowing costs would continue to rise this year.

In a new set of sobering projections, the Fed expects its key rate to rise faster and higher than expected, the economy to slow and unemployment to rise to a degree historically associated with recessions. .

Powell was candid about the “pain” ahead, citing rising unemployment and pointing to the housing market, a persistent source of rising consumer inflation, as likely in need of a “correction.” Read more

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Earlier Wednesday, the National Association of Realtors reported that sales of existing homes in the United States fell for a seventh consecutive month in August. Read more

The U.S. had a ‘hot real estate market… There was a big imbalance,’ Powell told a news conference after Fed policymakers unanimously agreed to raise the interest rate the central bank’s overnight benchmark in a range of 3.00% to 3.25% . “What we need is for supply and demand to be better aligned…We in the housing market probably have to go through a correction to get back to this place.”

That theme, of a persistent mismatch between U.S. demand for goods and services and the country’s ability to produce or import them, ran through a briefing in which Powell stuck to the hawkish tone set during his remarks the month last at the central bank in Jackson Hole. conference in Wyoming.

Recent inflation data has shown little to no improvement despite the Fed’s aggressive tightening – it also announced rate hikes of 75 basis points in June and July – and the labor market remains robust, with wages also increasing.

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The federal funds rate forecast for the end of this year signals an additional 1.25 percentage points of rate hikes to come at the Fed’s last two policy meetings in 2022, a level that implies another 75 basis point increase. on the horizon.

“The committee is firmly committed to bringing inflation back to its 2% target,” the Federal Open Market Committee responsible for setting central bank rates said in its policy statement following a policy meeting in two days.

The Fed “expects that continued increases in the target range will be appropriate.”

SLOW GROWTH

The Fed’s target key rate is now at its highest level since 2008 – and new projections show it will hit the 4.25% to 4.50% range by the end of this year and end in 2023 at 4.50%-4.75%.

Powell said the rate path shown showed the Fed was “strongly committed” to bringing inflation down from the highest levels in four decades and that officials would “keep going until the job is done,” even at the risk of rising unemployment and slowing growth. at a stall.

“We have to put inflation behind us,” Powell told reporters. “I wish there was a painless way to do this. There isn’t.”

Inflation by the Fed’s preferred measure was more than three times the central bank’s target. The new projections put it on a slow trajectory back to 2% in 2025, a protracted Fed battle to stifle the highest inflation since the 1980s, and potentially pushing the economy to the edge of a recession.

The Fed said “recent indicators point to modest growth in spending and output,” but the new projections put year-end economic growth for 2022 at 0.2%, rising to 1.2% in 2023 , well below the economy’s potential. The unemployment rate, currently at 3.7%, is expected to rise to 3.8% this year and 4.4% in 2023. This would be higher than the half-percentage-point rise in unemployment that has been associated to past recessions.

“The Fed was late to recognize inflation, late to start raising interest rates, and late to start unwinding bond purchases. Since then, they’ve caught up. And they haven’t not done yet,” said Greg McBride, chief financial officer. analyst at Bankrate.

US equities, already mired in a bear market due to concerns over Fed monetary policy tightening, ended the day sharply lower, with the S&P 500 Index (.SPX) slipping 1.8%.

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In the US Treasury market, which plays a key role in transmitting policy decisions from the Fed to the real economy, yields on the 2-year note crossed the 4% mark, their highest levels since 2007.

The dollar hit a new two-decade high against a basket of currencies, gaining more than 1%. The strength of the US currency – it has appreciated more than 16% since the start of the year – has fueled concerns among central banks around the world about potential exchange rates and other financial shocks.

Some aren’t even trying to match the Fed’s blistering pace of tightening, with the Bank of Japan expected to stick to its ultra-easy policy on Thursday and keep its benchmark rate minus 0.1%, likely leaving it as the last major monetary policy. global authority with a negative policy rate.

Others struggle to stay a little on top of the Fed. The Bank of England, for example, is expected to raise its key rate by at least half a percentage point on Thursday.

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Reporting by Howard Schneider; Additional reporting by Lindsay Dunsmuir; Editing by Dan Burns and Paul Simao

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