Fed Thinking Big With Latest Rate Hike; Powell vows to ‘carry on’

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  • The Fed raises its target interest rate to 3.00%-3.25%
  • Forecasts show another sharp rise likely by the end of the year
  • Powell: No ‘painless’ way to lower inflation

WASHINGTON, Sept 21 (Reuters) – The Federal Reserve delivered its third interest rate three-quarters of a percentage point increase on Wednesday and signaled a high probability of at least one more move of this size this year, with the head of the US central bank promising that officials would not let up on their battle to contain inflation.

The Fed raised its target interest rate to a range of 3.00% to 3.25% – the highest level since 2008 – and new projections showed that the key rate would increase between 4.25% and 4.50% by the end of this year before peaking at 4.50%-4.75% in 2023.

Fed Chairman Jerome Powell said U.S. central bank officials are “firmly committed” to bringing inflation down from the highest levels in four decades and “will continue until the job is done.” “, a process he repeated would not be without pain.

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“We need to put inflation behind us,” Powell told a news conference after the release of the Fed’s policy statement and updated quarterly economic projections. “I wish there was a painless way to do this. There isn’t.”

Inflation by the Fed’s preferred measure was more than three times higher than the central bank’s 2% target.

The Fed’s projections, meanwhile, showed economy slowdown in 2022, with year-end growth of 0.2%, dropping to 1.2% in 2023, well below the economy’s potential. The unemployment rate, currently at 3.7%, is expected to rise to 3.8% this year and 4.4% in 2023.

The Fed’s favorite inflation measure, which has hit the central bank’s 2% target more than three times, is expected to slowly return to that target in 2025.

Rate cuts are not expected before 2024.

Reuters Charts

US stocks tumbled after the release of the policy statement and were trading sharply lower by late afternoon.

The dollar hit another decade against a basket of currencies. In the US Treasury market, which plays a key role in transmitting policy decisions from the Fed to the real economy, yields on the 2-year note crossed the 4% mark, their highest levels since 2007.

The federal funds rate forecast for the end of this year signals an additional 1.25 percentage points of rate hikes to come at the Fed’s last two policy meetings in 2022, a level that implies another 75 basis point increase. on the horizon.

“The committee is firmly committed to bringing inflation back to its 2% target,” the Federal Open Market Committee responsible for setting central bank rates said after a two-day policy meeting.

The Fed “expects continued increases in the target range to be appropriate,” the statement said, repeating language from its previous July statement. Wednesday’s political decision was unanimous.

Reuters Charts

‘PLAY CATCH-UP’

The updated projections point to a protracted Fed battle to stifle the highest inflation since the 1980s, and a battle that could potentially push the economy to at least the edge of a recession.

The Fed said “recent indicators point to modest growth in spending and output,” but the economy is expected to slow further for the rest of the year.

“The Fed was late to recognize inflation, late to start raising interest rates, and late to start unwinding bond purchases. Since then, they’ve caught up. And they haven’t not done yet,” said Greg McBride, chief financial officer. analyst at Bankrate.

The rise in the unemployment rate to just under 4.5% by the end of next year, meanwhile, is higher than the half-percentage-point rise in unemployment that has been associated with past recessions.

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Reporting by Howard Schneider; Additional reporting by Lindsay Dunsmuir; Editing by Paul Simao

Our standards: The Thomson Reuters Trust Principles.

howard schneider

Thomson Reuters

Covers the US Federal Reserve, monetary policy and economics, graduated from the University of Maryland and Johns Hopkins University with previous experience as a foreign correspondent, business reporter and local Washington Post staffer.

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