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On Wednesday, the Federal Reserve approved a third consecutive hike of 75 basis points to curb inflation plaguing the US economy.
The benchmark
The rise was seen as unfathomable by markets months earlier.
However, he raised the central bank’s benchmark rate to new highs with a target range of 3% to 3.25%.
The latest hike makes it the highest official interest rate since the 2008 global financial crisis.
Wednesday’s decision is the Fed’s toughest policy move since the 1980 decision, which was also aimed at tackling inflation.
Rising rates are likely to cause economic hardship for millions of US businesses and households by increasing the cost of homes, cars, and credit card loans.
Economic pain
Jerome Powell, the chairman of the Federal Reserve, acknowledged the economic pain the tightened regime could cause.
A press conference was held on Wednesday afternoon following the announcement of the central bank’s monetary policy following a two-day monetary policy meeting.
“No one knows whether this process will lead to a recession or, if so, how significant that recession would be,” said Powell.
The Fed also released an updated summary of its economic plans, reflecting the pain.
Growth outlook
The quarterly report has shown a less optimistic perspective on economic growth and the labor market.
The median unemployment rate increased to 4.4% until 2023, greater than the 3.9% originally planned in June.
It is also much higher than the current rate (3.7%).
The main measure of economic production in the United States, GDP, was revised from 1.7% to 0.2% in June.
The figures are lower than the estimates of analysts because the economists of the Bank of America initially expected that the GDP would be revised at 0.7%.
Inflation prediction
Meanwhile, inflation expectations have also increased.
The Fed’s SEP shows that maximum personal consumer spending is expected to reach 4.5% this year and 3.1% next year.
The figures are higher than the June forecast of 4.3% and 2.7%, respectively.
A Fed forecast is incomplete without a projection of the Fed funds rate, which is the most important factor for investors looking for a Fed forecast.
It outlines what officials say is the right policy path for future rate hikes.
Figures released Wednesday show the Federal Reserve expects interest rates to remain high for years.
The median projection for the federal funds rate was also revised from 3.4% to 4.4% in June.
This number is expected to rise from 3.8% to 4.6% next year.
The interest rate forecast for June 2024 has also been revised from 3.4% to 3.9% and is expected to remain high at 2.9% in 2025.
Overall, the new projections show a growing risk of a hard landing – monetary policy should tighten ahead of a possible recession.
Forecasts also show that the Fed is willing to endure certain difficulties in economic conditions in order to reduce persistent inflation.
According to Moody’s Analytics, higher prices would mean consumers spent about $460 a month on groceries last year.
However, the labor market and consumer spending are strong areas.
Despite high mortgage interest rates, real estate prices still appear to be high in many places.
The government may believe the economy can continue to support aggressive rate hikes.
Reference:
Fed goes big again with third-straight three-quarter-point rate hike
