The Federal Reserve raised its benchmark policy rate by 0.75 percentage points and said another correction of that size could happen at its next meeting, signaling a pace of tightening. The currency is positive in the coming months as the central bank tries to tame the highest level of US inflation in 40 years.
At the end of its two-day policy meeting, the Federal Open Market Committee on Wednesday lifted its benchmark policy. ratio to a new target range of 1.50% to 1.75%, in a statement noting that it “anticipates that a continued rise in the target range will be appropriate”.
The decision marks an abrupt change from the Fed’s previously announced plans to raise interest rates by 0.50 percentage points for the second time in a row, which have been widely reported by policymakers. clear signal before the start of the scheduled “suspended” period prior to the meeting where their public communications are restricted. .
Esther George, president of the central bank’s Kansas City branch, was the sole opposer, and instead advocated following the Fed’s previous guidance.
The increase comes after two alarming reports released on friday showed an unexpected spike in consumer prices in May and worrying inflation expectations, suggesting that Americans are growing more concerned about the economic outlook.
Jay Powell, the Fed chair, noted at a news conference after the decision that high inflation was a key factor in the decision to raise interest rates by 0.75 percentage points, the first increase of that size since 2005. 1994 – although he said he did not expect adjustments of that magnitude to become widespread. However, Powell said the likelihood would increase by 0.50 or 0.75 percentage points at the next central bank meeting.
“The Committee pays close attention to inflation risks,” the Fed said in its statement, noting that Russia’s invasion of Ukraine has created “additional pressures” on inflation and weighed on operations. economic movement. It also added that the prolonged lockdown in China to combat the rise of Covid-19 is exacerbating supply chain disruptions that have helped boost prices.
Officials at the US central bank also on Wednesday sharply increased their rate forecasts from three months ago, when they put federal funds rates at 1.9 percent year-end and 2.8 percent. in 2023.
The “dot plot” of individual rate projections now shows policy rates rising to 3.4% by the end of 2022 – a level that suggests the Fed could make at least one more 0.75 point hike percent more this year and a few more- point adjustments before adjusting to a more typical quarter span.
Powell said that FOMC officials generally want to see rates “modestly restrained” by the end of the year.
Additional rate hikes are also anticipated in 2023, with officials saying the policy rate could go as high as 3.8%. Notably, the median forecast for the federal funds rate in 2024 is 3.4%, suggesting the Fed will need to reverse the ongoing rate hikes given the fact that the economy is likely to have already significantly slowed down at that time.
Along with the dot plot, the Fed has released new economic projections that more directly point to the upcoming monetary tightening – which also includes shrink of a $9 billion balance sheet — will involve “some pain,” as Powell acknowledged last month.
Annual gross domestic product growth is now forecast to slow to 1.7 percent by the end of the year and maintain that level through 2023, according to the median estimate of top economic officials. In March, they predicted the economy would expand each year by 2% or more until 2024.
Fed officials now expect core inflation to settle at 4.3% this year and 2.7% in 2023, slightly higher than what was forecast in March. Reflecting the impact of policy tightening, the unemployment rate is forecast to rise significantly from the 3.5% that senior officials in March had calculated by the end of next year. It is currently set to hit 3.9% in 2023 and 4.1% in 2024. It is currently at 3.6%.
The Fed is not alone in its efforts to tackle inflation, which has become a global phenomenon. Central banks across advanced and emerging economies have been quick to raise interest rates in the short term, with plans to do more this year.
However, the European Central Bank was forced to adjust its policy. It summon an emergency meeting of rate-setters on Wednesday, where they announced new emergency measures to tackle rising borrowing costs in weaker eurozone economies.
US financial markets rallied after Powell said he expected a tightening of 0.75 percentage points to be relatively uncommon, placing both 0.5 and 0.75 percentage point gains in interest federal funds rate at the next central bank policy meeting.
The S&P 500 index rose 2.4%, recovering from its worst five-day run since the early days of the coronavirus pandemic. The tech-heavy Nasdaq Composite rose 3.5%.
The $23 billion US Treasury market also rose on Powell’s comments, with yields on 10-year bonds – adjusted for global borrowing costs – down 0.11 percentage points to 3. 37%. Yields decrease as bond prices rise.
