The Fed launched the biggest rate hike since 1994, marking a slowing economy According to Reuters

By Howard Schneider and Ann Saphir

WASHINGTON (Reuters) – The Federal Reserve on Wednesday approved its biggest interest rate hike in more than a quarter of a century to stem a rise in inflation that U.S. central bank officials acknowledged has caused can erode public confidence in their power and are driven by events increasingly visible out of their hands.

The widely expected move raised the target federal funds rate by three-quarters of a percentage point to a range of 1.5% to 1.75%, which is still relatively low by historical standards.

But the Fed’s hawkish commitment to controlling inflation has led to tighter credit conditions being applied in the US stock and housing markets, and potentially slowing demand across the economy. economic – the intention of the Fed.

Officials also envision steady rate hikes through the rest of the year, possibly including 75 basis point hikes, with the federal funds rate at 3.4% by Last year. That would be the highest level since January 2008 and enough, the Fed predicts, will cause the economy to slow markedly in the coming months and lead to a rise in the unemployment rate.

Fed Chairman Jerome Powell said at a news conference after the end of the Fed’s latest two-day policy meeting, adding that the central bank was “not trying to cause a recession. “

Still, the Fed chief’s remarks were among his most sober remarks about the challenge he and policymakers face in bringing inflation down from its current 40-year high. level close to the 2% target, without a sharp slowdown in economic growth or a high unemployment rate.

“Our goal is really to bring inflation down to 2% while the labor market remains strong… What’s become clearer is that many factors that we don’t control will play a very important role. in deciding whether that can happen,” Powell said, citing the war in Ukraine and concerns about global supply.

“There’s a way for us to get there… It’s not getting easier. It’s becoming more and more challenging,” he told reporters, noting that the increase, he told reporters. interest rates announced last month and in March have so far failed to slow down inflation. , but allow it to continue accelerating to the point where recent data shows has begun to influence public attitudes in a way that could make the Fed’s job even more difficult.

‘FACE’

A survey released on Friday showed that consumer inflation expectations rose sharply in June, a result that Powell called “pretty eye-catching” and enough to tilt policymakers along. bullish 75 basis points larger in hopes of making faster progress on the inflation front and preserving public confidence that price increases will slow.

Powell talked about the change in consumer inflation expectations. “We are absolutely determined to keep them anchored.”

The pace of faster rate hikes outlined by officials on Wednesday more closely aligns with monetary policy with this week’s rapid shift in financial market views on what to do to price pressure control.

Bond yields fell after the Fed released projections on Wednesday that showed economic growth slowing to a below-trend 1.7% pace and policymakers expected a rate cut on Thursday. 2024. Stocks on Wall Street ended the day higher.

The interest rate futures market also reflects an 85% chance that the Fed will raise rates by 75 basis points at its next policy meeting in July. However, for the September meeting, the probability is greater – at more than 50% – of a 50 basis point increase.

Powell, departing from firmer guidance he had previously given on future rate hikes, made no promises on Wednesday.

With an unexpected jump in Friday’s monthly inflation report and as expected, “75 basis points seemed like the right thing to do at this meeting and that’s what we did.” he said.

But he said rate hikes of this size are not likely to be “common” and that when Fed policymakers assemble in July, an increase of half a percentage point or three-quarters of a point will be. is “most likely.”

NOT ‘VOLCKER MOMENT’

The tightening of monetary policy has been accompanied by a downgrade of the Fed’s economic outlook, with the economy currently slowing to below-trend growth of 1.7% this year, unemployment rising 3.7% at the end of this year and will continue to increase to 4.1% through 2024.

While no Fed policymaker is forecasting a full-blown recession, the economic growth forecast ranges to zero by 2023 – with a Fed sentiment index showing officials Almost unanimously think the risks are slower growth, and higher-than-expected inflation and unemployment.

Analysts, many of them critical of the Fed’s March projections showing inflation easing with modest rate hikes and no rise in unemployment, say the new outlook is more realistic. .

“The Fed’s willingness to let unemployment go up and risk a recession is collateral damage to bring inflation back down. This isn’t Volcker’s moment for Powell for the magnitude of the spike, but he’s like he’s like. a Mini-Me version of “Volcker with this move,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments, referring to former Fed Chairman Paul Volcker, whose battle with inflation in the early 1980s involved a sharp and unexpected rate hike of up to 4 percentage points all at once.

Even with more aggressive interest rate measures implemented on Wednesday, policymakers still see inflation as measured by the personal consumption expenditures price index at 5.2% this year. and only slows down to 2.2% by 2024.

Inflation has become the most pressing economic issue for the Fed and is also beginning to shape the political landscape, with household sentiment worsening amid rising food and gasoline prices.

Kansas City Fed President Esther George is the only policymaker to oppose Wednesday’s decision he prefers a half percentage point rate hike.