The Federal Reserve raised its benchmark interest rate by 0.75 percentage points for the third time in a row and signalled its intention to keep monetary policy tight as it tries to hit the brakes on the overheating US economy.
The Federal Open Market Committee lifted the federal funds rate to a new target range of 3 per cent to 3.25 per cent after its two-day policy meeting, advancing its most aggressive monetary tightening campaign since the early 1980s.
“Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures,” the committee said in a statement on Wednesday following the rate rise.
The committee, which said the rate rise was unanimously supported by policymakers, added it “anticipates that ongoing increases in the target range will be appropriate”.
The US central bank also published an updated “dot plot” compiling Fed officials’ individual interest rate projections until the end of 2025, which reinforced their commitment to a “higher for longer” approach. The projections signalled further large rate rises this year and no cuts before 2024.
The median estimate for the fed funds rate by year-end jumped to 4.4 per cent, suggesting another 0.75 percentage points rate rise this year before the Fed starts to scale back. Officials also forecast the main policy rate would peak at 4.6 per cent in 2023 before declining to 3.9 per cent in 2024. It projected to drop further to 2.9 per cent in 2025.
In June, the last time dot plot was updated, officials predicted the fed funds rate would reach just 3.4 per cent by the end of the year and 3.8 per cent in 2023, before declining in 2024. At that time, the median estimate for the unemployment rate was 3.9 per cent in 2023 and 4.1 per cent in 2024.
Following the statement, US stocks slid, with the S&P 500 and Nasdaq Composite down 0.5 per cent and 0.7 per cent, respectively. The two-year Treasury yield, which moves with interest rate expectations, reached a fresh 15-year high. Earlier in the day, it broke through 4 per cent for the first time since 2007.
Bryan Whalen, co-chief investment officer at TCW, said the Fed had “reiterated” its “hawkish message” and “completely eliminat[ed] any hope for a more dovish message”.
“What jumps out are the dots for 2023 and the difference between the dots and the market,” he said. “The Fed is going to get to 4.6 per cent through 2023, while the market has a 0.5 percentage point cut by the end of the year.”
Officials on Wednesday more directly acknowledged the economic costs associated with their efforts to tackle inflation, pencilling in higher unemployment and lower growth.
Officials see the unemployment rate rising from its current rate of 3.7 per cent to 4.4 per cent in 2023, where it is expected to stay through the following year. By 2025, the median estimate edges down to 4.3 per cent.
Over the same period, annual growth in gross domestic product is set to slow dramatically to 0.2 per cent by the end of the year before registering a 1.2 per cent pace in 2023 as “core” inflation drops from the 4.5 per cent level forecasted for year-end to 3.1 per cent.
As of July, the Fed’s preferred gauge, the core personal consumption expenditures price index, stood at 4.6 per cent.
Growth is set to stabilise just shy of 2 per cent 2024 and 2025, when officials finally expect core inflation to move closer to the Fed’s 2 per cent target range.
In June, policymakers projected that as inflation falls closer to the Fed’s target of 2 per cent, growth would slow to only 1.7 per cent. Most economists now expect the US economy to tip into a recession next year.
The September meeting marked an important juncture for the Fed, which faced questions this summer over its resolve to restore price stability after Fed chair Jay Powell suggested the central bank was starting to worry about overtightening.
However, at the annual symposium of central bankers in Jackson Hole, Wyoming, Powell sought to counter that narrative by declaring the Fed “must keep at it until the job is done”.
Investors have responded to the Fed’s more hawkish tone by pushing US government bond yields to their highest level in more than a decade.
The two-year Treasury, which is most sensitive to changes in the policy outlook, is trading at about 4 per cent, having hovered at roughly 3 per cent at the start of August. The yield on the benchmark 10-year note also recently rose above 3.5 per cent for the first time since 2011.
US stocks, meanwhile, recorded their biggest weekly loss in months last week following the release of official data showing an unexpected increase in consumer price growth in August.
