(Bloomberg) — Federal Reserve Chairman Jerome Powell vowed that officials would crush inflation after raising interest rates by 75 basis points for the third straight time and signaling even more aggressive hikes than investors were waiting.
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“We have to put inflation behind us. I wish there was a painless way to do it. There isn’t,” Powell told a news conference in Washington on Wednesday after officials raised the benchmark rate target of federal funds to a range of 3% to 3.25%.
“Higher interest rates, slower growth and a softening labor market are painful for the public we serve. But they’re not as painful as not restoring price stability and having to go back and do it all over again new,” he said.
The S&P 500 stock index ended near session lows, extending its decline from a record high in January to more than 20%. The gauge struggled to find direction after the Fed announcement, rising as much as 1.3% at one point. Yields on the two-year Treasury note topped 4%, surpassing that mark for the first time since 2007. The dollar rallied.
Officials forecast rates will reach 4.4 percent by the end of this year and 4.6 percent in 2023, a more brutal shift than what was called the dot plot. That implies a fourth straight hike of 75 basis points could be on the table for the next meeting in November, about a week before the US midterm elections.
The Fed chief agreed that the median of quarterly projections presented by policymakers implied 125 basis points more tightening this year. But he said no decision had been made on the size of the rate hike at the next meeting, stressing that a fairly large group of officials preferred to raise rates by just one percentage point by the end of the year.
Powell said his main message was that he and his colleagues were determined to get inflation down to the Fed’s 2 percent target, which they would “stay at until the job is done.” The phrase invoked the title of former Fed chief Paul Volcker’s memoir, “Keeping at It.”
“We’ve written what we think is a plausible path for the federal funds rate. The path that we actually execute will be sufficient, will be sufficient to restore price stability,” he said. It was a strong signal that officials would not hesitate to raise rates more than they currently expect if that is what is needed to cool inflation.
Later, rates were seen falling to 3.9% in 2024 and 2.9% in 2025, their projections showed.
“This is Powell’s last roll of the dice and it goes all in,” said Derek Tang, an economist at LH Meyer in Washington. “Higher unemployment forecasts are fair warning that they will cause pain, and it’s just getting started.”
Updated forecasts showed unemployment rising to 4.4% at the end of next year and the same at the end of 2024, from 3.9% and 4.1% respectively in June projections .
The Fed’s quarterly projections, which showed a steeper rate path than officials announced in June, underscored the Fed’s determination to cool inflation despite the risk that rising borrowing costs could push rates United States in recession. Interest rate futures showed investors betting rates would peak around 4.6% in early 2023.
What Bloomberg Economics Says…
“More important even than the 75 basis point rate hike at the September 20-21 FOMC meeting was the change in the committee’s views on the updated Summary of Economic Projections. Almost two-thirds of members now see rates peaking next year, even higher than the markets’ 4.5% rate. Bloomberg Economics expects the final rate to eventually be 5%.
— Anna Wong, Andrew Husby and Eliza Winger (Economists)
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Powell and his colleagues, prompted by a slow initial response to escalating price pressures, have pivoted aggressively to catch up and are now offering the most aggressive policy tightening since the Fed under Volcker four decades ago.
Estimates for economic growth in 2023 were cut to 1.2% and 1.7% in 2024, reflecting a greater impact of tighter monetary policy.
Read more: Global race to raise rates tilts economies toward recession
Inflation peaked at 9.1% in June, as measured by the 12-month change in the US consumer price index. But it has not fallen as quickly in recent months as Fed officials had hoped: In August, it was still 8.3%.
Meanwhile, job growth has remained robust and the unemployment rate, at 3.7%, is still below levels that most Fed officials consider sustainable over the long term.
The failure of the labor market to soften has added to the impetus for a more aggressive tightening path at the US central bank.
The Fed’s action is also taking place against a backdrop of tightening by other central banks to deal with price pressures that have increased around the world. All together, about 90 have raised interest rates this year, with half of them increasing by at least 75 basis points in one go.
(Updates with market closing levels in the fourth paragraph.)
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