The Federal Reserve made history on Wednesday, agreeing to a third consecutive hike of 75 basis points in a strong move to tackle the severe inflation plaguing the US economy.
The massive rally, which could not be understood by markets just months ago, is taking the central bank’s benchmark lending rate to a new target range of 3%-3.25%. This is the highest rate on federal funds since the global financial crisis in 2008.
Wednesday’s decision marks the Fed’s strongest policy move since the 1980s to fight inflation. It also likely causes economic pain to millions of American businesses and families by increasing the cost of borrowing for things like homes, cars and credit cards.
Federal Reserve Chairman Jerome Powell has acknowledged the economic pain this rapid tightening regime could cause.
“No one knows if this process will lead to a recession, or if so, how significant this recession will be,” Powell said Wednesday afternoon at a news conference following the central bank’s policy announcement, which came after a two-day monetary policy-making meeting. . .
The Fed’s updated Summary of Economic Outlook, released on Wednesday, reflects this pain: The quarterly report showed less optimistic forecasts for economic and labor market growth, with the average unemployment rate rising to 4.4% in 2023, above the Fed’s 3.9% Federal. Officials expected in June and well above the current rate of 3.7%.
US gross domestic product, the main measure of economic output, was revised to 0.2% from 1.7% in June. This is well below analysts’ estimates: Economists at Bank of America estimated that GDP would be revised to 0.7%.
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Inflation expectations have also grown. Core personal consumption expenditures, the Fed’s preferred measure of price increases, is expected to reach 4.5% this year and 3.1% in 2023, the Fed’s SEP showed. This is higher than the June forecast of 4.3% and 2.7%, respectively.
Perhaps most important for investors seeking future guidance from the Federal Reserve is the forecast for the federal funds rate, which determines what officials believe is the appropriate policy path for a future rate hike. Figures released on Wednesday showed that the Federal Reserve expects interest rates to remain high for years to come.
The average federal funds rate forecast for 2022 was revised upwards to 4.4% from 3.4% in June. This figure rises to 4.6% from 3.8% for 2023. The rate has also been revised upwards for 2024 to 3.9% from 3.4% in June and is expected to remain high at 2.9% in 2025.
In general, the new forecasts show the increased risk of a hard landing, as monetary policy tightens to the point of causing a recession. They also provide some evidence that the Fed is willing to accept the “pain” of economic conditions in order to bring down persistent inflation.
Higher prices mean consumers are spending about $460 more per month on groceries than they did last year, according to Moody’s Analytics. However, the labor market remains strong, as is consumer spending. Home prices remain high in many areas, despite a significant rise in mortgage rates. This means that the Fed may feel that the economy could swallow more rate hikes.
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