The Fed says it could raise rates at a slower pace, but the destination is now 5% or higher
The Federal Reserve on Wednesday approved the fourth key U.S. rate hike in a row, and interest rates are signaled more likely to rise than previously forecast.
News of higher ending interest rates overshadowed more dovish comments from the central bank’s statement that it may move more slowly to better gauge the effects on the economy.
At 2 p.m. Eastern, the market
DJIA,
cheered when the Fed first signaled in its official statement that it would be watching closely to see if rapidly rising borrowing costs could damage the economy due to the usual “lag” in the rate of growth. growth slowed down.
But stocks fell after Chairman Jerome Powell’s tougher speech in a news conference.
By a unanimous vote, the Fed raised interest rates by 0.75 percentage points, to 3.75% to 4%. That is the highest level in 15 years.
In new language, the Fed said it expected to keep raising rates further “until they are restrained enough” to bring inflation back to its 2 percent long-term target “over time.”
Idea: How Powell pivoted away from the Fed’s dovish message and boosted markets
The Fed also said it would “take into account cumulative monetary policy tightening, the lags by which monetary policy affects economic activity and inflation, and economic and financial development.”
Many investors and economists see the language as a step back from the Fed’s aggressive strategy this year.
Matthew Luzzetti, chief US economist at Deutsche Bank, said Powell left the door open to slowing the pace of rate hikes even if the data didn’t show lower inflation.
Mr. Powell emphasized that the Fed has taken a lot of tightening measures, he added.
Powell acknowledged in his post-meeting news conference that at some point “it would be appropriate to slow the pace of growth.”
Things turned hawkish as Powell said the central bank’s benchmark rate was likely “better than previously expected”. The Fed’s final forecast estimates its benchmark interest rate to be in the range of 4.5%-4.75%.
Two months ago, the Fed raised interest rates by half a percentage point in December, but that could change.
The final size of the move at the Fed’s next monetary policy meeting, on December 13 and 14, will depend on economic data, economists say. There will be two unemployment reports and two consumer price index prints before that meeting.
In light of Powell’s comments, the conventional wisdom is that the Fed will scale back a rate hike by 50 basis points next month, and then enact a final, precious increase in early 2023.
Many economists are now offering a “final” interest rate of 5%, if not higher.
Latest reading every year Core consumer inflation hits a high of 6.6% in SeptemberThe strongest increase since 1982.
Powell said the window to achieve a “soft landing” is narrowing. A large number of economists are calling for a recession next year.
Economists warn that if there is a recession, the Fed will not come to the rescue. The central bank has shown a desire to keep the benchmark rate high to limit inflation.
Currently, the economy is still showing many signs of life. The economy grew at a 2.6% annual rate in the third quarter. Economists expect October’s jobs report on Friday to show job growth above 200,000.
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