UPDATED 3:22 P.M.
WASHINGTON (Reuters) -The Federal Reserve delivered its third straight interest rate increase of three-quarters of a percentage point on Wednesday and signaled a high likelihood of at least one more move of that size this year, with the U.S. central bank’s chief vowing that officials would not let up in their battle to contain inflation.
The Fed raised its target interest rate to a range of 3.00%-3.25% – the highest level since 2008 – and new projections showed the policy rate rising to between 4.25%-4.50% by the end of this year before topping out at 4.50%-4.75% in 2023.
Fed Chair Jerome Powell said U.S. central bank officials are “strongly resolved” to bring down inflation from the highest levels in four decades and “will keep at it until the job is done,” a process he repeated would not come without pain.
“We have got to get inflation behind us,” Powell said in a news conference after the release of the Fed’s policy statement and updated quarterly economic projections. “I wish there were a painless way to do that. There isn’t.”
Inflation by the Fed’s preferred measure has been running at more than three times the central bank’s 2% target.
The Fed’s projections, meanwhile, showed the economy slowing to a crawl in 2022, with year-end growth of 0.2%, rising to 1.2% in 2023, well below the economy’s potential. The unemployment rate, currently at 3.7%, is projected to rise to 3.8% this year and to 4.4% in 2023.
The Fed’s preferred measure of inflation, which has been running at more than three times the central bank’s 2% target, is seen slowly returning to that target in 2025.
Rate cuts are not foreseen until 2024.
U.S. stocks seesawed following the release of the policy statement and were trading sharply lower in late-afternoon trading.
The dollar hit a fresh two-decade against a basket of currencies. In the U.S. Treasury market, which plays a key role in the transmission of Fed policy decisions into the real economy, yields on the 2-year note vaulted over the 4% mark, their highest levels since 2007.
The federal funds rate projected for the end of this year signals another 1.25 percentage points in rate hikes to come in the Fed’s two remaining policy meetings in 2022, a level that implies another 75-basis-point increase in the offing.
“The committee is strongly committed to returning inflation to its 2% objective,” the central bank’s rate-setting Federal Open Market Committee said after the end of a two-day policy meeting.
The Fed “anticipates that ongoing increases in the target range will be appropriate,” the statement said, repeating language from its previous statement in July. The policy decision on Wednesday was unanimous.
‘PLAYING CATCH-UP’
The updated projections point to an extended Fed battle to quell the highest bout of inflation since the 1980s, and one that potentially pushes the economy at least to the borderline of a recession.
The Fed said that “recent indicators point to modest growth in spending and production,” but the economy is still expected to slow in the remainder of the year.
“The Fed was late to recognize inflation, late to start raising interest rates, and late to start unwinding bond purchases. They’ve been playing catch-up ever since. And they’re not done yet,” said Greg McBride, chief financial analyst at Bankrate.
The rise in the unemployment rate to just shy of 4.5% by the end of next year, meanwhile, is above the half-percentage-point rise in unemployment that has been associated with past recessions.
(Reporting by Howard Schneider; Additional reporting by Lindsay Dunsmuir; Editing by Paul Simao)
——————————-
(Reuters) – Wall Street’s main indexes returned to positive territory in mid-afternoon trading on Wednesday after a brief wobble in the immediate aftermath of the Federal Reserve’s rate announcement which had also forecast rates remaining higher for longer.
At the end of its two-day meeting, the Fed lifted its policy rate by 75 basis points for the third time to a 3.00-3.25% range. Most market participants had expected such an increase, with only a 21% chance of a 100 bps rate hike seen prior to the announcement.
However, policymakers also signaled more large increases to come in new projections showing its policy rate rising to 4.40% by the end of this year before topping out at 4.60% in 2023. This is up from projections in June of 3.4% and 3.8% respectively.
“The market’s initial reaction is due to the dot plot,” said Thomas Hayes, chairman and managing member of Great Hill Capital.
“Participants had expected maybe late 2023, they would kind of cut back or ease off (on rate hikes), and based on their expectations today, they’re going to be higher for longer and the initial reaction is the market doesn’t like it.”
However, after initially giving up earlier gains and sinking in the minutes after the 2 p.m. ET announcement, U.S. indexes clawed their way back into the black.
By 2:43 p.m. ET (1843 GMT), the Dow Jones Industrial Average rose 74.52 points, or 0.24%, to 30,780.75, the S&P 500 gained 16.08 points, or 0.42%, to 3,872.01 and the Nasdaq Composite added 63.40 points, or 0.55%, to 11,488.45.
(Reporting by Medha Singh, Devik Jain and Ankika Biswas in Bengaluru and David French in New York; Editing by Marguerita Choy)
Comments