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Jerome Powell, chairman of the U.S. Federal Reserve, speaks during a news conference following a Federal Open Market Committee (FOMC) meeting in Washington, D.C., US, on Wednesday, July 27, 2022.

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Powell Says Rates to Be Raised ‘Purposefully’ to Curb Inflation

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What You Need to Know

  • The decision, which was unanimous, takes the target range for the benchmark federal funds rate to 3% to 3.25% -- the highest level since before the 2008 financial crisis, and up from near zero at the start of this year.
  • Officials expect the benchmark rate to rise to 4.4% by year-end and 4.6% during 2023.

Federal Reserve Chair Jerome Powell said officials were determined to curb inflation after they raised interest rates by 75 basis points for a third straight time and signaled a more aggressive-than-expected path of rate hikes to come.

“We are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2%,” he told a press conference in Washington on Wednesday after officials lifted the target for the benchmark federal funds rate to a range of 3% to 3.25%. That’s the highest since before the 2008 financial crisis, and up from near zero at the start of this year.

Officials forecast that rates would reach 4.4% by the end of this year and 4.6% in 2023, a more hawkish shift in their so-called dot plot than expected. That implies a fourth-straight 75 basis-point hike could be on the table for the next gathering in November, about a week before the U.S. midterm elections.

Powell said his main message was that officials were “strongly resolved” to bring inflation down to the Fed’s 2% goal and added that “we will keep at it until the job is done.” The phrase invoked the title of former Fed chief Paul Volcker’s memoir “Keeping at It.”

Policy makers now expect the key rate to rise to 4.4% by year end and 4.6% during 2023, according to the median estimate in updated quarterly projections published alongside the statement.

Further ahead, rates were seen stepping down to 3.9% in 2024 and 2.9% in 2025.

The Fed's New Dot Plot as of Sept 21, 2022, chart from Bloomberg

The policy-sensitive two-year Treasury yield surged, jumping above the 4% level. Meanwhile the S&P 500 index plunged — reversing early day gains — and the dollar index hit a new record high.

Swaps traders boosted where they now see the funds rate ending the year to about 4.31%, from around 4.22% before the FOMC meeting wrapped.

The projections, which showed a steeper rate path than officials laid out in June, underscore the Fed’s resolve to cool inflation despite the risk that surging borrowing costs could tip the US into recession.

What Bloomberg Economics Says …

“More important even than the 75-basis-point rate hike at the Sept. 20-21 FOMC meeting was the shift in the committee’s views in the updated Summary of Economic Projections. Almost two-thirds of members now see rates peaking next year even higher than the 4.5% markets had priced in. Bloomberg Economics expects the terminal rate ultimately will be 5%.”

– Anna Wong, Andrew Husby and Eliza Winger (economists)

Powell and his colleagues, slammed for a slow initial response to escalating price pressures, have pivoted aggressively to catch up and are now delivering the most aggressive policy tightening since the Fed under Volcker four decades ago.

The updated forecasts also showed unemployment rising to 4.4% by the end of next year and the same at the end of 2024 — up from 3.9% and 4.1%, respectively, in the June projections.

Estimates for economic growth in 2023 were marked down to 1.2% and 1.7% in 2024, reflecting a bigger impact from tighter monetary policy.

Inflation peaked at 9.1% in June, as measured by the 12-month change in the U.S. consumer price index. But it’s failed to come down as quickly in recent months as Fed officials had hoped: In August, it was still 8.3%.

Job growth, meanwhile, has remained robust and the unemployment rate, at 3.7%, is still below levels most Fed officials consider to be sustainable in the longer run.

The failure of the labor market to soften has added to the impetus for a more-aggressive tightening path at the US central bank.

Fed action is also taking place against the backdrop of tightening by other central banks to confront price pressures which have spiked around the globe. Collectively, about 90 have raised interest rates this year, and half of them have hiked by at least 75 basis points in one shot.

(Image: Bloomberg)

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