On Wednesday, the Federal Reserve approved a third consecutive 75 basis point hike to curb inflation plaguing the US economy.
The benchmark
The rise was considered unfathomable by the markets months earlier.
However, it raised the central bank’s benchmark rate to new highs with a target range of 3% to 3.25%.
The latest increase makes it the highest official rate since the 2008 global financial crisis.
Wednesday’s decision is the Fed’s toughest policy move since the 1980 decision, which also aimed to tackle inflation.
Rising rates are likely to cause economic hardship for millions of US businesses and households by increasing the cost of home, automobile, and credit card loans.
Economic pain
Jerome Powell, the chairman of the Federal Reserve, acknowledged the economic pain the rapidly tightening regime could cause.
A press conference was held on Wednesday afternoon following the announcement of the central bank’s monetary policy following a two-day monetary policy meeting.
“No one knows whether this process will lead to a recession or, if so, how significant that recession would be,” said Powell.
The Fed also released an updated summary of its economic plans, reflecting the pain.
Growth prospects
The quarterly report showed a less optimistic outlook for economic growth and the labor market.
The median unemployment rate rose to 4.4% through 2023, higher than the 3.9% originally forecast by Fed officials in June.
It is also well above the current rate (3.7%).
The main measure of economic output in the United States, GDP, was revised down from 1.7% to 0.2% in June.
The numbers are lower than analysts’ estimates, as Bank of America economists initially expected GDP to be revised down to 0.7%.
Inflation forecasts
Meanwhile, inflation expectations have also increased.
The Fed’s SEP showed that main personal consumption expenditure is expected to reach 4.5% this year and 3.1% next year.
The figures are higher than the June forecast of 4.3% and 2.7% respectively.
The Fed Funds Rate Projection is the most important element for investors looking for a Fed forecast.
It outlines what officials say is the right political path for future rate hikes.
Figures released Wednesday show the Federal Reserve expects interest rates to remain high for years.
The median projection for the federal funds rate was also revised from 3.4% to 4.4% in June.
This number is expected to rise from 3.8% to 4.6% next year.
The interest rate forecast has also been revised from 3.4% to 3.9% for June 2024 and is expected to remain high at 2.9% in 2025.
Overall, the new projections show a growing risk of a hard landing – monetary policy should tighten ahead of a possible recession.
Projections also show that the Fed is willing to bear certain difficulties in economic conditions in order to reduce ongoing inflation.
According to Moody’s Analytics, higher prices would mean consumers spent about $460 per month on groceries last year.
However, the labor market and consumer spending are strong areas.
In many places, it appears that real estate prices are still high despite high mortgage rates.
The government may believe the economy can continue to support aggressive rate hikes.
Reference:
Fed goes big again with third-straight three-quarter-point rate hike
