US Fed opts for third-straight big rate hike, ready for recession, job losses
DECCAN CHRONICLE | DC Correspondent
WASHINGTON: Federal Reserve officials raised interest rates by 75 basis points for the third consecutive time and forecast they would reach 4.6% in 2023, stepping up their fight to curb inflation that’s persisted near the highest levels since the 1980s.
In a statement Wednesday following a two-day meeting in Washington, the Federal Open Market Committee repeated that it "is highly attentive to inflation risks." The central bank also reiterated it "anticipates that ongoing increases in the target range will be appropriate," and "is strongly committed to returning inflation to its 2% objective."
The decision, which was unanimous, takes the target range for the benchmark federal funds rate to 3% to 3.25% -- the highest level since before the 2008 financial crisis, and up from near zero at the start of this year.
Officials expect the benchmark rate to rise to 4.4% by year end and 4.6% during 2023, according to the median estimate in updated quarterly projections published alongside the statement. That indicates a fourth-straight 75 basis-point hike could be on the table for the next gathering in November, about a week before the midterm elections. Further ahead, rates were seen stepping down to 3.9% in 2024 and 2.9% in 2025.
Federal Reserve officials gave their clearest signal yet that they’re willing to tolerate a recession as the necessary trade-off for regaining control of inflation.
"No one knows whether this process will lead to a recession or if so, how significant that recession would be," US Federal Reserve Chair Jerome Powell told reporters after officials lifted the target range for their benchmark rate to 3% to 3.25%. "The chances of a soft landing are likely to diminish to the extent that policy needs to be more restrictive, or restrictive for longer. Nonetheless, we’re committed to getting inflation back down to 2%."
That sober assessment is in sharp contrast from six months ago, when Fed officials first started raising rates from near zero and pointed to the economy’s strength as a positive -- something that would shield people from feeling the effects of a cooling economy.
Officials now implicitly acknowledge, via their more pessimistic unemployment projections, that demand will need to be curtailed at every level of the economy, as inflation has proved to be persistent and widespread.
The Wednesday hike at was more hawkish than expected by economists. In addition, officials cut growth projections, raised their unemployment outlook and Chair Jerome Powell repeatedly spoke of the painful slowdown that’s needed to curb price pressures running at the highest levels since the 1980s.
"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."
To be clear, Fed officials aren’t explicitly projecting a recession. But Powell’s rhetoric about the rate hikes likely causing pain for workers and businesses has gotten progressively sharper in recent months. On Wednesday, in his post-meeting press conference, Powell said a soft landing with only a small increase in joblessness would be "very challenging."
"We have always understood that restoring price stability while achieving a relatively modest increase in unemployment and a soft landing would be very challenging," Powell said Wednesday. "We have got to get inflation behind us. I wish there were a painless way to do that. There isn’t."
Fed officials’ apprehension about their ability to bring down inflation is evident in other projections, too. Even amid a new rate-hike path, officials still don’t see inflation easing to their 2% target until 2025.
If they privately suspect that this means the risk of recession is rising, they aren’t saying so out loud.
Powell told reporters several times that a softer labor market may be necessary to sufficiently bring down demand. But he also pointed to higher savings rates and more money at the state level indicating that the economy is still reasonably strong, a "good thing" that he said would make it more resistant to a significant downturn.
The projections, which showed a steeper rate path than officials laid out in June, underscore the Fed’s resolve to cool inflation despite the risk that surging borrowing costs could tip the US into recession.
Before the release, traders expected rates to reach 4.5% in early 2023 before falling about a half point by the end of the year.
Powell and his colleagues, slammed for a slow initial response to escalating price pressures, have pivoted aggressively to catch up and are now delivering the most aggressive policy tightening since the Fed under Paul Volcker four decades ago.
The updated forecasts also showed unemployment rising to 4.4% by the end of next year and the same at the end of 2024 -- up from 3.9% and 4.1%, respectively, in the June projections.
Inflation peaked at 9.1% in June, as measured by the 12-month change in the US consumer price index. But it’s failed to come down as quickly in recent months as Fed officials had hoped: In August, it was still 8.3%.
Job growth, meanwhile, has remained robust and the unemployment rate, at 3.7%, is still below levels most Fed officials consider to be sustainable in the longer run.
The failure of the labour market to soften has added to the impetus for a more-aggressive tightening path at the US central bank.
Fed action is also taking place against the backdrop of tightening by other central banks to confront price pressures which 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.