The US Federal Reserve (Fed) has once again raised its interest rates by another 0.75 percentage points making it the third consecutive time this year.
The Fed Chair, Jerome Powell, announced on Sept 22 that policymakers would “keep at” combating inflation and also signalled that the interest rates would continue increasing this year.
Based on a Reuters report, the Fed is anticipating a faster rate hike and to a higher-than-expected level after reviewing the new set of projections. This would result in a sluggish economy and increase in unemployment rates that have been historically associated with recessions.
During the announcement, Powell was said to be forthright about the coming “pain”, noting growing joblessness and singling out the property market as being highly likely to be in need of a “correction”.
Following the announcement of increasing the Fed’s benchmark rate to a range of 3% to 3.25%, Powell stated that the property market’s supply and demand needs to be better aligned and that those in the housing market would be required to market correct in order to reach that level.
Recent inflation data has shown little to no improvement despite the Fed’s vigorous tightening policy while the labour market has also remained strong with wages on the rise.
US’s federal funds rate forecast for the end of 2022 implies another 1.25 percentage points increase in the remaining two policy meetings for the year, an implication of another 75 basis points increase in the offing.
The Federal Open Market Committee stated in its policy statement that the committee is still strongly committed to bringing inflation to its target of 2% with the Fed anticipating “that ongoing increases in the target range will be appropriate”.
Recession to come
The current target policy rate by the Fed is at its highest since 2008, with a new forecast expecting more hikes to come and reaching the range of 4.25% to 4.50% by end of 2022 and rounding out 2023 at 4.50% to 4.75%.
Powell said the Fed was “strongly resolved” to bring down inflation from its highest level in four decades and that the officials would “keep at it until the job is done” despite the risk of higher unemployment rates and the economy stalling.
Recent indicators hint to modest improvement in spending and production, but new predictions put year-end economic growth at 0.2% in 2022 and 1.2% in 2023, significantly below the economy’s potential.
The Fed is expecting that unemployment rates would rise to 3.8% and 4.4% for this year and in 2023 respectively, making it above the half-percentage-point increase that could be seen in previous recessions.
“The Fed was late to recognise inflation, raise rates, and end bond purchases. Since then, they’ve played catch-up and its still not yet done,” Bankrate’s chief financial analyst, Greg McBride said.
US stocks, already in a bear market due to Fed tightening worries, fell dramatically, with the S&P 500 index down 1.8% during the end of the day.
The US Treasury market, which transmits Fed policy decisions to the real economy, saw their two-year note yields soar above 4%, their highest level since 2007.
The greenback hit a two-decade high against numerous currencies, gaining more than 1%. Its surge has stoked concerns throughout central banks around the world about the exchange rates and other financial shocks.
Some countries like Japan, are expected to maintain their policy at a minus 0.1%, while others are trying to stay ahead of the curve such as the Bank of England that is anticipated to raise its interest rates by 0.5 percentage points in its policy meeting.
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