The Federal Reserve continued its hawkish path of rate hikes, saying its job of taming inflation isn’t achieved and will require future rate hikes to bring about slower economic growth.
In announcing a third 0.75% increase to the federal funds rate, Chairman Jerome Powell repeated the central bank’s commitment to 2% inflation and signaled further pain ahead for consumers.
“Reducing inflation is likely to require a sustained period of below trend growth … We will keep at it until the job is done,” he said in remarks after the Federal Open Market Committee meeting. “No one knows with certainty where the economy will be a year or more from now.” The 75 bps hike marks the third straight increase of that size, and comes as inflation climbs to 40-year highs and unemployment hits historic lows.
Powell signaled that more rate hikes will be coming to reach 2% inflation “quickly.” The central bank’s current target range stands between 3% and 3.25%, a level not seen since 2008 and much higher than the near-zero levels from earlier this year.
Projections from central bank officials show rates reaching as high as 4.5% by the end of 2022, a much steeper increase than was initially promulgated by the Fed earlier this year.
“We think we’ll need to bring our funds rate to a restrictive level, and to keep it there for some time,” Powell added.
Stocks fluctuated after the announcement before plummeting to finish the trading day. The S&P dropped 1.7% while the Nasdaq fell nearly 1.8%. The SPDR S&P 500 ETF Trust (SPY) and the Invesco QQQ Trust (QQQ) tumbled the same amount as their corresponding indices.
The dollar rose 0.9%, hitting a fresh 20-year high. The yield on the U.S. two-year note, which is particularly sensitive to policy moves, rose to 4.04%. That was a slight downtick after surging to 4.1% earlier in the day, which marked the highest rise since 2007. Bond prices move inversely to yields.
“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,” Chief Financial Analyst at Bankrate.com Greg McBride said in a note. “How high interest rates eventually go ad how long they will have to stay there are almost entirely dependent on the path of inflation in the months ahead.”
Source: Federal Reserve
Forecasts also show the unemployment rate rising to 4.4% by the end of 2023, up from 3.7% currently. Real GDP growth projections stand at 0.6%.
“What didn‘t come well is the forecast for the medium and long term,” said Guido Petrelli, CEO at Merlin Investor. “The hike’s plan opens us up for a likely possible recession; the question is what kind of recession are we entering into, a mild or a more serious one.”
He went on to add that the likelihood of a deep recession is slim, considering the current “robust economy.” And while the projected increase in unemployment may be alarming to some, Petrelli noted that it may be a necessary consequence to bring down inflation.
“We're living in this contradiction where we want inflation to go down, but at the same time we don’t want the labor market to go down. Even if there is an increase, the increase in unemployment is manageable,” he said. “The real danger is if the forecast is wrong.”
Contact Shubham Saharan at [email protected]