Washington | The Federal Reserve on Wednesday (Thursday AEST) downgraded its economic outlook for the US and warned of consistently high inflation and a worsening job market as it raised interest rates by 0.75 percentage point for a third straight time.
Fed chairman Jerome Powell said policymakers were “strongly committed” to curbing inflation as they pushed the benchmark interest rate to a target range of 3 per cent to 3.25 per cent, their highest point since 2008 and up from near zero at the start of this year.
Officials now expect the funds rate to reach a high of 4.6 per cent in 2023 before stepping down to 3.9 per cent in 2024. The bank does not expect to cut rates at all next year.
That was more hawkish than expected by economists. Officials also cut growth projections, raised their unemployment outlook, and Mr Powell repeatedly spoke of the painful slowdown that is needed to curb price pressures running at the highest levels since the 1980s.
“We’re committed to getting inflation back down to 2 per cent because we think that a failure to restore price stability would mean far greater pain later on,” he told a press conference in Washington.
Financial markets are pricing in the Fed funds rate to end the year at about 4.31 per cent, up from around 4.22 per cent before the latest policy meeting.
Mr Powell said his main message was that officials were “strongly resolved” to bring inflation down to the Fed’s 2 per cent goal and added that “we will keep at it until the job is done”. The phrase invoked the title of former Fed chief Paul Volcker’s memoirKeeping at It.
The Fed lifted its median unemployment forecast to 3.8 per cent by the end of this year. It believes the jobless rate will reach 4.4 per cent in 2023, where it will hold throughout 2024 before easing back to 4.3 per cent in 2025.
These revised projections are up from June, which had unemployment at 3.7 per cent this year, 3.9 per cent next year and 4.1 per cent in 2024.
Thierry Wizman, strategist at Macquarie, said the more pessimistic labour market outlook showed the Fed was trying to manage expectations of future economy pain. However, some economists still expect a full-blown recession.
“The new projections show the Fed is willing to ease people’s expectations on a slowdown in the economy. I think such projections are more symbolic than they are realistic,” Mr Wizman said.
The Fed slashed its growth forecast to 0.2 per cent this year from a June projection of 1.7 per cent. The central bank next year expects a weak rebound to 1.2 per cent, again lower than its June forecast of 1.7 per cent. For 2024, it forecasts growth of 1.7 per cent, down from an earlier estimate of 1.9 per cent.
“Powell’s admission that there will be below-trend growth for a period should be translated as central bank speak for ‘recession’,” said Seema Shah of Principal Global Investors. “Times are going to get tougher from here.”
The lower forecasts reflect a bigger impact from tighter monetary policy.
All three major US equity benchmarks ended in the red after a volatile trading session; the Dow slid 522 points. The Dow and S&P 500 each fell 1.7 per cent, while the Nasdaq shed 1.8 per cent.
Following the rate rises from the Fed earlier this year, Wall Street had responded positively. In March, the S&P 500 was up 2.24 per cent on the day. In May, it gained 2.99 per cent. In June, the benchmark rallied 1.46 per cent and in July, the index gained 2.62 per cent.
With such historical results, Macquarie’s Mr Wizman said it was likely that bargain hunters were taking advantage of the early sell-off in markets.
The Fed also acknowledged that inflation had become stickier and raised slightly its projections. This year it expects core inflation – which excludes food and energy – to hit 4.5 per cent, up from the 4.3 per cent it was forecasting in June.
Next year, core inflation is expected to hit 3.1 per cent, again up from the Fed’s June forecast of 2.7 per cent.
Inflation peaked at 9.1 per cent in June, as measured by the 12-month change in the US consumer price index. But it has failed to come down as quickly as Fed officials had hoped. In August, it was still 8.3 per cent.
The Fed action is taking place against the backdrop of tightening by other central banks to confront price pressures that have spiked around the globe. Collectively, about 90 have raised interest rates this year, and half of them have hiked by at least 75 basis points in one shot.
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