The Federal Open Market Committee (FOMC) raised US interest rates by 75 basis points on Wednesday, the third consecutive hike for a measure struggling with stubborn inflation levels.
According to CME’s FedWatch tool, the market was pricing in an 82% chance of a 0.75% rate hike before the Fed statement was released at 2pm ET. The odds of a historic increase of 100 bp, which had not occurred since 1981, stood at 18%.
Bitcoin touched $18,704 on Bitstamp within 5 minutes of the announcement of the hike, according to data from TradingView. The coin then shot back up to $19,800 within minutes, but the move did not last as it quickly reversed. Bitcoin was trading below $19,000 at press time.
Along with its statement on interest rates, the FOMC also shared average projections of the most likely outcomes for real GDP growth, the unemployment rate and the funds rate for this year and the next three.
FOMC participants forecast GDP growth for 2022 to be slightly positive at 0.2%, while they expect the unemployment rate to remain below 4% at 3.8%. By 2023, however, unemployment is expected to rise above this level to 4.4%, while GDP growth is expected to reach 1.2%. On the other hand, the average federal funds rate is projected to be 4.4% this year and 4.6% in 2023. It would only drop the following year to around 3.9%.
FOMC and Federal Reserve Chairman Jerome Powell joined a group of reporters for a live press conference following the hike announcement. He commented on the committee’s decision to raise rates by three-quarters of a percentage point and hinted at possible future monetary policy actions.
“We expect the increases to continue [in interest rates] will be appropriate,” Powell said at the news conference. “The pace of these increases will depend on the data coming in … but at some point, it will be appropriate to slow the pace of the increases.”
While hinting that he will eventually move away from big hikes like those enacted in the last three meetings, Powell strongly believes that a tough stance will be necessary to curb US inflation before it settles into the economy. He reiterated this position many times throughout the press conference.
“We’re going to have to take our funds rate to a restrictive level and keep it there for a while,” he said, adding that the FOMC wants to see economic growth below trend (1.8 percent) and cooling in the labor market.
When asked what he meant by “tightening” levels for the Fed’s funds rate, Powell explained that “today, we just went to the lowest level of what could be tightening.” With today’s 75bp hike, US interest rates hit 3.25%, the highest since 2008.
Powell also clarified that the chances of a “soft landing” — the act of raising interest rates enough to curb inflation without triggering a recession — are likely to “diminish” as the FOMC keeps rates going up. He reiterated that the economy will have to slow and unemployment will have to rise for inflation to slow.
“You want to be in a place where real rates are positive,” Powell said.
The president of the US central bank reiterated that he believes that inflation, despite having fallen from its peak of 9.1%, is still “excessive level”.
“We need to keep making these big increases.”
