The Federal Reserve continued its fight against high inflation on Wednesday, agreeing to a third straight super-sized interest rate hike and saying rates could rise significantly before the end of the year.
Officials said they would raise their benchmark federal-funds rate by 0.75 percentage points to 3.25% and pencil in another 125 basis points for a proportional increase by the end of the year. This will bring the benchmark rate to a midpoint of 4.4% by the end of the year, compared to an estimate of 3.8% in June.
Central banks now see a “terminal” rate of 4.6% in 2023. In keeping with their “longer-term” rhetoric, the central bank doesn’t see any rate cuts until 2024.
In a statement, the Fed said job growth was “strong” despite moderate economic growth. “The FOMC remains committed to returning inflation to its 2% target,” the statement said. According to the Fed’s new forecasts, the central bank will reach inflation in 2025.
Economists say the August consumer price data showing a jump in inflation is a “game changer” for the Fed, as it shows that efforts to bring down inflation have had little effect.
As a result, the Fed has redoubled its efforts and is now seeing higher rates than they did in June.
At the Fed’s Jackson Hole retreat, Fed Chairman Jerome Powell said the central bank will keep inflation on hold until the job is done.
“While high interest rates, slow growth and soft labor market conditions will keep inflation at bay, they will also cause some pain to households and businesses. These are unfortunate costs of reducing inflation. But failure to restore price stability will mean even more pain,” Powell said.
The Fed’s new forecast details the pain — higher unemployment and slower growth than forecast in June.
The Fed expects the unemployment rate to reach 4.4% next year. Currently, the unemployment rate is 3.7%.
The Fed has raised interest rates at an alarming rate, raising concerns among economists that the central bank may not miss signs that the economy is slowing sharply and heading into recession.
At the same time the Fed is raising rates, it is allowing the balance sheet to shrink, a policy known as “quantitative tightening.”
The vote on today’s rate hike was unanimous.
Fed Chairman Jerome Powell will hold a press conference at 2:30 PM ET.
US stocks DJIA,
SPX,
They were trading ahead of the Fed’s decision. The yield on the 10-year Treasury note TMUBMUSD10Y;
It rose to 3.593% and 3.571% on Tuesday afternoon. Tuesday’s level was the highest since March 3, 2011.