May 29, 2023

The US Federal Reserve offers big interest rate hikes, signals the next one could be lower

It noted the still-evolving effects triggered by its rapid rate hike and said the target range for future hikes is “appropriate”.

The U.S. central bank has raised interest rates by 0.75 percentage points as it continues to battle the worst outbreak of inflation in 40 years, but signaled that future increases in borrowing costs could be made in smaller steps to account for “cumulative tightening of monetary policy.” it has so far adjusted.

Wednesday’s policy statement noted the still-evolving impact triggered by the Fed’s rapid rate hikes and the desire to refine the federal funds rate to “sufficiently restrictive to restore inflation.” to 2 percent over time”.

“Continued increases in the target range are appropriate,” the U.S. Federal Reserve said at the end of its latest two-day policy meeting. While officials did not rule out any future decisions, they said: “In determining the pace of future increases in the target area [Federal Open Market] The committee takes into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.

Monetary policy refers to a set of tools used by a country’s central bank to manage a country’s overall money supply, including strategies such as setting interest rates.

The language acknowledges the broad debate that has arisen over Fed policy tightening, its impact on the US and global economies, and the risk that continued high interest rate hikes could stress the financial system or trigger a recession.

While its recent rapid hikes have been done “rapidly” to achieve inflation more than three times the Fed’s 2 percent target, the central bank is now moving into a more nuanced phase — fine-tuning “front-loading.”

The policy decision set the target federal funds rate between 3.75 percent and 4 percent, the highest since early 2008. The US Federal Reserve has raised interest rates at its last six meetings since March, the fastest rate hike since the previous one. Fed Chairman Paul Volcker’s fight to curb inflation in the 1970s and 1980s.

“Front loading” done

The Fed’s statement said officials remained “extremely vigilant about inflation risks,” opening the door to further hikes.

The Fed noted that the economy appeared to be growing modestly, with job growth still “strong” and unemployment low.

Speaking at a news conference after the Federal Open Market Committee (FOMC) meeting, Fed Chairman Jerome Powell said the next rate hike may be smaller in size.

“That time is coming and it could come as soon as the December meeting,” Powell said, adding that “no decision has been made yet” on what action to take.

A signal that the Fed appears to be done with the “front-loading” phase of its tightening sparked a broad rally in US stocks and bond markets, but Powell’s remarks that interest rates were likely to rise higher than previously estimated caused a reversal.

At the September meeting, the median estimate of policymakers pegged the top fed funds rate at between 4.5 percent and 4.75 percent next year. The interest rate futures market now suggests a roughly 50/50 chance that interest rates will rise to 5 percent or higher next year.

The S&P 500 index fell by about one percent and the Nasdaq Composite by more than 1.5 percent.

U.S. Treasury yields, which had fallen sharply since the Fed’s statement, turned higher.

The change in the FOMC’s statement “surprised me a little bit,” said Derek Tang, an economist at forecast firm LH Meyer. The Fed’s statement “was a lot clearer about a potential switch to the downside than I thought it would be. I thought [Fed Chair Jerome Powell] would reserve much more consideration until December, but it seems like the committee agreed that they could trade down as early as December depending on how the data goes.”

#Federal #Reserve #offers #big #interest #rate #hikes #signals

Leave a Reply

Your email address will not be published. Required fields are marked *