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On Wednesday, the Federal Reserve approved a third straight 75 basis point hike to curb inflation plaguing the US economy.
The benchmark
The rise had been deemed unfathomable by markets months earlier.
However, it raised the central bank’s benchmark interest rate to new highs with a target range of 3% to 3.25%.
The latest hike makes it the highest policy rate since the 2008 global financial crisis.
Wednesday’s decision is the Fed’s toughest policy move since its 1980 decision, which was also aimed at tackling inflation.
Rising rates will likely create economic hardship for millions of American businesses and households by increasing the cost of loans for homes, cars, and credit cards.
Read also: Inflation will be under control, according to President Joe Biden
Economic pain
Jerome Powell, the chairman of the Federal Reserve, acknowledged the economic pain the rapid tightening regime could cause.
A press conference was held on Wednesday afternoon following the central bank’s policy announcement 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 economic plans, which reflects the pain.
Growth prospects
The quarterly report showed a less optimistic outlook for economic growth and the labor market.
The median unemployment rate rose to 4.4% through 2023, higher than the 3.9% originally forecast by Fed officials in June.
It is also well above the current rate (3.7%).
The main measure of economic output in the United States, GDP, was revised down from 1.7% to 0.2% in June.
The numbers are lower than analysts’ estimates, as Bank of America economists initially expected GDP to be revised down to 0.7%.
Read also: After US stock market hits the worst day since 2020, the market goes steady
Inflation forecast
Meanwhile, inflation expectations have also increased.
The Fed’s SEP showed that core personal consumption spending is expected to come in at 4.5% this year and 3.1% next year.
The figures are higher than the June forecast of 4.3% and 2.7%, respectively.
The Fed Funds Rate projection is the key element for investors looking for a Fed forecast.
It outlines what officials believe 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 rate projection has also been revised from 3.4% to 3.9% for June 2024 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 until a possible recession.
Projections also show proof that the Fed is willing to bear certain difficulties in economic conditions in order to reduce persistent inflation.
According to Moody’s Analytics, higher prices would mean that consumers spent about $460 per month on groceries last year.
However, the labor market and consumption expenditure are strong areas.
Many places show that real estate prices are still high despite considerable mortgage interests.
The government might believe that the economy can continue to support aggressive interest rate increases.
Reference:
Fed goes big again with third-straight three-quarter-point rate hike
