The Federal Reserve raised its benchmark interest rate by 0.75 percentage points for the third time in a row, signaling its intention to keep monetary policy tight as it tries to slow the overheated US economy.
The Federal Open Market Committee lifted the federal funds rate to a new target range of 3 percent to 3.25 percent after its two-day policy meeting, advancing its most aggressive monetary tightening campaign since the early 1980s.
New estimates from central bank politicians showed that the benchmark interest rate rose to 4.4 per cent at the end of this year before reaching its peak of 4.6 per cent next year.
At a news conference after the rate hike, Fed Chair Jay Powell said the bank was likely to keep interest rates at a level where they limit economic growth “for some time”[ads1]; and warned that doing so would hurt growth and lead to higher unemployment.
“We will continue to do that until we are confident the job is done,” he added, echoing the language he used at the Jackson Hole symposium for central bankers last month, when he delivered his most hawkish message since being named to the top job at Fed.
In a statement, the FOMC said: “Inflation remains high, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.”
The committee, which said the rate hike was unanimously supported by policymakers, added that 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 through the end of 2025, reinforcing their commitment to a “higher for longer” approach. The estimates signaled further large interest rate increases this year and no cuts until 2024.
The median estimate for the year-end Fed Funds rate jumped to 4.4 percent, suggesting another 0.75 percentage point rate hike in 2021 before the Fed begins tapering. Officials also forecast that the key policy rate will peak at 4.6 percent in 2023 before falling to 3.9 percent in 2024. It is projected to drop further to 2.9 percent in 2025.
These estimates were significantly more hawkish than in June, the last time the dot plot was updated. At the time, officials predicted the fixed-income fund would reach just 3.4 percent by the end of the year and 3.8 percent in 2023, before falling in 2024.
Then the median estimate for unemployment was 3.9 per cent in 2023 and 4.1 per cent in 2024.
After the statement, US stocks fell, with the S&P 500 and Nasdaq Composite down 0.5 percent and 0.7 percent respectively. The two-year government yield, which moves with interest rate expectations, reached a new 15-year high. Earlier in the day, it broke through 4 percent for the first time since 2007.
Bryan Whalen, chief investment officer at TCW, said the Fed had “reiterated” its “hawkish message” and “completely eliminated[ed] some hope for a more dove-like 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 percent through 2023, while the market has a 0.5 percentage point cut by the end of the year.”
Officials on Wednesday acknowledged more directly the economic costs of their efforts to tackle inflation, citing higher unemployment and slower growth.
Officials see the unemployment rate rising from the current rate of 3.7 percent to 4.4 percent in 2023, where it is expected to remain until the end of 2024. By 2025, the median estimate will drop to 4.3 percent.
Over the same period, annual growth in gross domestic product will slow dramatically to 0.2 percent by the end of the year before registering a pace of 1.2 percent in 2023 as “core” inflation falls from the 4.5 percent level projected for the year. -end to 3.1 percent.
As of July, the Fed’s preferred gauge, the core price index for personal consumption expenditures, was at 4.6 percent.
Growth is set to stabilize at just 2 percent in 2024 and 2025, when officials finally expect core inflation to move closer to the Fed’s target range of 2 percent.
In June, policymakers projected that as inflation falls closer to the Fed’s 2 percent target, growth will slow to just 1.7 percent. 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 this summer faced questions about its decision to restore price stability after Fed Chair Jay Powell suggested the central bank was beginning to worry about overtightening.