Fed approves third large interest rate hike and signals more before year-end


The Federal Reserve on Wednesday continued their aggressive fight against high inflation, agreeing to the third straight super-sized interest rate hike and saying that rates are going to go sharply higher before the end of the year.

Officials said they would raise their benchmark federal-funds by 0.75 percentage point to a range of 3% to 3.25%, and penciled in another 125 basis points in rate hikes by year end. That would bring the benchmark rate to a midpoint of 4.4% by the end of the year, up from the prior estimate in June of 3.8%.

The central bankers now see a “terminal” rate of 4.6% in 2023. In keeping with their “higher for longer” rhetoric, the central bank doesn’t see any rate cuts until 2024. 

In a statement, the Fed said job growth has been “robust” even with modest economic growth. “The FOMC is strongly committed to returning inflation to its 2% target,” the statement said. According to new projections from the Fed, the central bank will reach its inflation target in 2025.

Economists believe that the August consumer price data, which showed a jump in core inflation, was a “game changer” for the Fed because it showed that efforts to bring down inflation haven’t made much of a dent.

As a result, the Fed has redoubled its efforts and now sees much higher rates then they did in June. 

At the Fed’s Jackson Hole retreat, Fed Chairman Jerome Powell said the central bank would keep fighting inflation until the job is done.

“While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain,” Powell said. 

The Fed’s new forecast details that pain – projecting higher unemployment and lower growth than in their prior projections in June.

The Fed sees the unemployment rate reaching 4.4% next year. At the moment, the unemployment rate is 3.7%.

The Fed has raised its benchmark interest rate with remarkable speed and doing so has raised concerns among economists that the central bank will miss signs that the economy is seriously slowing and in risk of falling into recession.

At the same time the Fed is raising rates, it is allowing its balance sheet to shrink, a policy known as “quantitative tightening.”

The vote on today’s rate hike was unanimous. 

Fed Chairman Jerome Powell will hold a press conference at 2:30 p.m. Eastern

U.S. stocks
DJIA,
-0.41%

SPX,
-0.34%
were trading higher ahead of the Fed decision. The yield on the 10-year Treasury note
TMUBMUSD10Y,
3.560%



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