Federal Reserve Chairman Jerome Powell vowed on Wednesday that he and his fellow policymakers would “continue to push through inflation” as the U.S. central bank raised interest rates by three-quarters of a percentage point for the third time in a row. and announced that borrowing costs would continue to rise this year.
In a sobering new set of projections, the Fed foresees that its key rate will rise at a faster pace and to higher levels than expected, the economy will slow down and unemployment will rise to levels historically associated with recessions.
Powell was blunt about the “pain” to come, citing rising unemployment and the pick-up of the housing market, an ongoing source of rising consumer inflation, likely in need of a “correction”.
Earlier on Wednesday, the National Association of Realtors reported that US home sales fell for the seventh straight month in August.
The United States has had a “red-hot housing market… There was a major imbalance,” Powell said at a news conference after Fed policymakers unanimously agreed to raise the central bank’s overnight interest rate to a range of 3.00%. -3.25%. “What we need is supply and demand to better match each other… Probably we need to go through a correction in the housing market to get back to that place.”
That theme, of an ongoing mismatch between U.S. demand for goods and services and the country’s ability to produce or import them, ran through a briefing in which Powell maintained the aggressive tone he set during his remarks at the central bank of Jackson Hole. conference in Wyoming.
Recent inflation data has shown little to no improvement despite the Fed’s aggressive tightening – it also announced 75 basis point rate hikes in June and July – and the labor market remains robust and wages are rising.
The Federal Funds interest rate projected for the end of this year points to an additional 1.25 percentage points of rate hikes during the Fed’s two remaining policy meetings in 2022, a level that marks another 75 basis point increase.
“The commission is strongly committed to bringing inflation back to its target of 2%,” the central bank’s Federal Open Market Committee said in its policy statement following a two-day policy meeting.
The Fed “expects continued increases in the target range will be appropriate.”
The Fed’s target policy rate is now at its highest level since 2008 — and new forecasts show it to rise to 4.25%-4.50% by the end of this year and end at 4.50% in 2023- 4.75%.
Powell said the indicated interest rate path showed the Fed was “determined” to bring inflation back from its highest level in four decades and that officials “as long as the job is done,” even at the risk of unemployment rising and growth slowing. . to a stall.
“We need to get inflation behind us,” Powell told reporters. “I wish there was a painless way to do that. There isn’t.”
Inflation under the Fed’s preferred measure has been more than three times higher than the central bank’s target. The new projections are slowly pushing it back to 2% by 2025, a prolonged struggle by the Fed to quell the highest inflation rate since the 1980s, and one that may push the economy to the brink of recession.
The Fed said “recent indicators point to modest growth in spending and production,” but the new forecast puts year-end economic growth at 0.2% for 2022, rising to 1.2% in 2023, well above below the potential of the economy. The unemployment rate, which currently stands at 3.7%, is expected to rise to 3.8% this year and 4.4% in 2023. That would be more than the half a percentage point increase in unemployment associated with previous years. recessions.
“The Fed was too late in recognizing inflation, too late in raising interest rates, and too late in phasing out bond purchases. They’ve been catching up ever since. And they’re not done yet,” said Greg McBride, chief financial analyst at Bankrate.
US stocks, already mired in a bear market on concerns over the Fed’s monetary tightening, ended the day sharply lower, with the S&P 500 (.SPX) index falling 1.8%.
In the US treasury market, which plays a key role in the transfer of Fed policy decisions into the real economy, the yield on the 2-year note soared above 4%, the highest level since 2007.
The dollar hit a new high in two decades against a basket of currencies, gaining more than 1%. The strength of the US currency – it has risen more than 16% year-on-year – has alarmed central banks around the world about potential exchange rates and other financial shocks.
Some aren’t even trying to match the blazing pace of Fed tightening, with the Bank of Japan expecting to stick with its ultra-easy policy on Thursday and keep its key rate at minus 0.1%, making it likely the last major monetary policy. stays. authority in the world with a negative policy rate.
Others do their best to stay somewhat abreast of the Fed. For example, the Bank of England is expected to raise its key rate by at least half a percentage point on Thursday.
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