The Fed raises interest rates by half a point as central banks enter a new phase

The Federal Reserve on Wednesday raised its benchmark policy rate by half a percentage point and signaled its intention to continue squeezing the US economy next year, as central banks on both sides of the Atlantic enter a new phase in the fight against inflation.

At its last meeting of the year, the FOMC voted unanimously to increase the federal funds rate to a target range of 4.25 percent to 4.5 percent, ending a months-long streak of 0.75 percentage point rate hikes.

The pivot to rate hikes is likely to be followed internationally, as the European Central Bank and Bank of England both prepare to raise borrowing costs by half a percentage point on Thursday.

Economists say inflation has peaked in all three regions, with a decline in Title rate in the United States and the UK this week, but central banks remain concerned it will take too long to fall towards their 2 percent targets.

In a press conference following the decision, feed it Chairman Jay Powell said, “We’ve covered a lot of ground and we’re not yet feeling the full effects of our rapid tightening yet. We have more work to do.”

Powell welcomed the decline in core price growth in October and November but warned that “it will take more evidence to give confidence that inflation is on a sustainable downward path”.

In its statement, the Fed said that “continued increases” in the policy rate would be “appropriate” in order to ensure that the economy is sufficiently constrained to control price growth.

Trading was choppy after Powell’s statement and press conference. The Standard & Poor’s 500 Index closed down 0.6 percent and the Nasdaq Composite fell 0.8 percent. The two-year Treasury yield, which moves with interest rate expectations, was steady at 4.2 percent.

Before the decision, investors debated whether the Fed would drop the language of “continued hikes” in favor of something more dovish, said Jay Barry, co-head of US interest rate strategy at JPMorgan.

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Adhering to the phrase, Barry added, “suggests that we are multiple meetings away from the tightening cycle that is being conducted.”

Along with the interest rate decision, the Fed published a revised “point chart” of officials’ individual interest rate expectations, indicating support for further tightening next year.

The median estimate for the federal funds rate by the end of 2023 has increased to 5.1 percent, compared to the 4.6 percent projected peak last time the forecast was made. Posted in Sept. This indicates that a total of 0.75 points of interest rate hike is still to come.

Most officials now see the policy rate dropping to 4.1 percent in 2024 and 3.1 percent in 2025, compared to 3.9 percent and 2.9 percent, respectively, three months ago.

However, Powell noted that Fed officials have continually increased their forecasts for maximum interest rates and warned: “I cannot tell you with confidence that we will not raise our estimates . . . again.”

A large group of policymakers has forecast the policy rate to exceed 5.25 percent next year, with only two saying it should peak below 5 percent.

Asked about the likelihood of a rate cut next year, as Fed funds futures traders have expected, Powell said the Fed has not yet considered easing.

“I wouldn’t see us considering cutting rates until the committee is confident that inflation is coming down to 2% in a sustainable way. That is the test,” he said, adding that the point chart does not indicate any easing in 2023.

Policymakers have increased their inflation forecasts for next year, with the median estimate for the core PCE price index — their preferred measure of inflation — rising to 3.5 percent, from 3.1 percent in September.

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In 2024, most officials expect it will have only fallen to 2.5 percent, which is still above the central bank’s target. It is expected to drop to 2.1 percent the following year.

Policymakers were more pessimistic about the outlook. The economy is set to grow by just 0.5 percent in 2023 before recording a 1.6 percent expansion in 2024 as the unemployment rate reaches 4.6 percent.

In September, most officials expected economic growth of 1.2 percent for 2023 followed by a 1.7 percent increase in 2024, with the unemployment rate rising to 4.4 percent.

The December meeting marks a significant turning point for the Federal Reserve, which this year embarked on the most serious attempt to tighten monetary policy since the early 1980s.

Since the Central Bank’s actions have begun to have a noticeable impact on the economy, A.A discussion It emerged about the need for more restraint to calm inflationary pressures that remain high in many sectors.

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