(Bloomberg) – Federal Reserve Chairman Jerome Powell vowed officials would dampen inflation after raising interest rates by 75 basis points for a third consecutive month and announcing even more aggressive rate hikes than investors had expected.
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“We have to get inflation behind us. I wish there was a pain free way to do this. There isn’t,” Powell said at a news conference in Washington on Wednesday, after officials raised the federal funds’ target rate to a range of 3% to 3.25%.
“Higher interest rates, slower growth and a slowing labor market are all painful for the public we serve. But they are not as painful as the failure to restore price stability and the need to come back and do it again later,” he said.
The S&P 500 stock index ended near session lows, cutting its decline to more than 20% from a January record. The gauge struggled to find direction after the Fed announcement, rising as much as 1.3% at one point. Yields on the 2-year Treasury bill exceeded 4%, breaking that mark for the first time since 2007. The dollar rallied.
Officials forecast rates would hit 4.4% by the end of this year and 4.6% in 2023, a more radical shift in their so-called dot plot than expected. That means a fourth straight hike of 75 basis points could be on the table for the next gathering in November, about a week before the US midterm elections.
The Fed chair agreed that the median of quarterly forecasts provided by policymakers implied another 125 basis point tightening this year. But he said no decision on the size of the rate hike would be made at the next meeting, stressing that a fairly large group of officials prefer to hike rates by just one percentage point by the end of the year.
Powell said his main message was that while he and his colleagues are determined to bring inflation down to the Fed’s 2 percent target, they “will stick with it until the job is done.” The phrase referred to the title of former Fed Chair Paul Volcker’s memoir, Keeping at It.
“We wrote down what we think is a plausible path for the federal funds rate. The path we actually take will be enough – it will be enough to restore price stability,” he said. That was a strong signal that officials would not hesitate to raise rates more than they currently expect if needed to cool inflation.
Going further, rates were seen dropping to 3.9% in 2024 and 2.9% in 2025, their forecasts showed.
“This is Powell’s last roll of the dice, and he’s going all out,” said Derek Tang, an economist at LH Meyer in Washington. “The higher unemployment forecasts are fair warning that they will inflict pain and this has only just begun.”
The updated forecasts showed that unemployment will rise to 4.4% by the end of next year and to the same level by the end of 2024 – up from 3.9% and 4.1% in the June forecasts, respectively.
The Fed’s quarterly forecasts, which showed a steeper interest rate path than official June figures, underscore the Fed’s determination to cool inflation despite the risk that rising borrowing costs could plunge the US into recession. Interest rate futures showed investor bet rates would peak at around 4.6% in early 2023.
What Bloomberg Economics Says…
“More important than the 75 basis point rate hike at the 20-21 FOMC meeting. September was the change in the committee’s views on the updated summary of economic forecasts. Almost two-thirds of members now expect interest rates to be even higher next year than the 4.5% that markets had priced in. Bloomberg Economics expects the final yield to be 5% eventually.”
— Anna Wong, Andrew Husby and Eliza Winger (economists)
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Powell and his colleagues, criticized for a slow initial response to escalating price pressures, have pivoted aggressively to catch up and are now delivering the most aggressive monetary tightening since Volcker’s Fed four decades ago.
Estimates for economic growth in 2023 have been revised down to 1.2% and 1.7% in 2024, reflecting a greater impact of tighter monetary policy.
Read more: The global race to raise interest rates is pushing economies towards recession
Inflation peaked at 9.1% in June as measured by the 12-month change in the US CPI. But it hasn’t fallen as fast in recent months as Fed officials had hoped: it was down 8.3% in August.
Meanwhile, job growth has remained robust and the unemployment rate, at 3.7%, is still below what most Fed officials see as sustainable over the longer term.
The failure of the labor market to weaken has increased the impetus for a more aggressive Fed tightening path.
The Fed’s actions also come amid tightening by other central banks to counter price pressures that have been mounting around the world. Altogether about 90 hiked rates this year, and half of them raised at least 75 basis points in one fell swoop.
(Updates with closing prices in fourth paragraph.)
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