Jerome Powell goes into the ‘danger zone’ – CNN | Jewelry Dukan

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As the Federal Reserve began raising interest rates to fight decades of high inflation, Chairman Jerome Powell stressed that the central bank could raise the cost of borrowing without doing too much damage to the economy.

“We believe the economy is very strong and will be able to withstand tighter monetary policy,” Powell said in March.

Six months later, Powell sounds less confident. The Fed announced its third straight outsized rate hike on Wednesday and indicated it would continue to take aggressive action if inflation stayed high.

Slower growth and higher unemployment “are all painful for the public we serve, but they’re not as painful as the failure to restore price stability and the need to come back and do it again later,” Powell said.

Breakdown: The central bank didn’t crack down as hard as some investors thought. Some had braced themselves for the first full-point hike in modern Fed history. However, there were signs in the central bank’s forecasts that it plans to stay tough, even if it means pushing the economy into rocky terrain.

“The Fed has now entered the ‘danger zone’ in terms of the interest rate shock it is inflicting on the US economy,” said Peter Boockvar, chief investment officer at Bleakley Financial Group.

The Fed’s policy rate is now between 3% and 3.25%. Earlier, policy leaders had hinted that rates could rise to 3.4% by the end of this year, which would mean the cycle of rate hikes is almost over.

No longer. The Fed is now planning rates of 4.4% by the end of the year, implying further large hikes in the coming months.

At the same time, the Fed revised upwards its expectations for unemployment. Currently, the unemployment rate is expected to hit 4.4% in 2023, up from an estimate of 3.9% in June.

What it means: The Fed will not budge, even if its powerful medicine is hard for the American economy to swallow.

“In our view, a 4% Fed Funds Rate is about the highest the economy could sustain, and the Fed is clearly threatening to hike rates above that level,” said Mark Haefele, chief investment officer at UBS Global Wealth Management , customers said after the announcement.

It’s news that could roil markets in the coming weeks as Wall Street digests it.

US stocks alternated between gains and losses on Wednesday before ending the day lower. The S&P 500 closed down 1.7%. The US dollar, meanwhile, continues to soar.

Paul Donovan, chief economist at UBS Global Wealth Management, told me that volatility is likely to continue because investors are unsure of how the Fed is measuring its success. Also, many factors driving up inflation numbers – such as the war in Ukraine and drought conditions – are beyond the central bank’s control.

“What’s going to add to the market uncertainty is that the Fed isn’t saying what it’s trying to do,” Donovan said. But it is admit that it might hurt.

Japan on Thursday tried to prop up its currency’s value for the first time in 24 years, buying yen to prevent further weakness against the US dollar.

“The government is concerned about this excessive volatility and has just taken decisive action,” Masato Kanda, Japan’s deputy finance minister for international affairs, told reporters Thursday after the rare move.

When asked by a reporter whether the “decisive action” meant “market intervention,” Kanda replied in the affirmative.

Important context: Thursday’s decision marks the first time since 1998 that the Japanese government has intervened in the foreign exchange market by buying yen.

Earlier Thursday, the Bank of Japan announced it would maintain ultra-loose monetary policy, signaling its determination to remain an outlier among G7 countries scrambling to raise interest rates to tame inflation.

Why It Matters: The action underscores the global implications of Fed policy and the US dollar’s breakneck rally pushing other currencies lower. This makes it more expensive for other countries to import food and fuel and encourages price increases at home. (More on that below.)

Inflation in Japan rose above the Bank of Japan’s target and hit the fastest annual pace in eight years.

Central banks stress that they will do everything to bring inflation under control. Meanwhile, world leaders and policymakers are warning that failure is not an option.

Kristalina Georgieva, the head of the International Monetary Fund, told CNN’s Christiane Amanpour on Wednesday that unless steps are taken to protect those most affected by the fallout of rising prices, there will be “people on the streets” around the world are.

“If we don’t bring inflation down, it will hit the most vulnerable because a surge in food and energy prices is an inconvenience for the better off – a tragedy for the poor,” Georgieva said. “That’s why we think of the poor first as we work to fight inflation vigorously.”

Central banks have “no choice” but to raise interest rates to fight inflation, she added.

“The critical issue before us is the restoration of growth conditions, and price stability is a critical condition,” Georgieva said.

Big picture: Georgieva’s comments are a reminder of the real implications of the decisions policymakers are weighing. But the rapid rise in interest rates could also wreak havoc around the world.

“As central banks around the world simultaneously raise interest rates in response to inflation, the world could be headed for a global recession in 2023 and a series of financial crises in emerging and developing economies that would do lasting damage,” the statement said World Bank said in a recent report.

Darden Restaurants (DRI) reports results ahead of US markets opening. Costco (COST) and FedEx (FDX) will follow after the market close.

Also today: Initial US jobless claims for last week arrive at 8:30 am ET.

Available tomorrow: A first look at the latest Purchasing Managers’ Indices for the top economies will shed some light on how they’re holding up.

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