The Federal Reserve raised its base rate by 0.75 percentage points for the first time in three decades and signaled an aggressive tightening of monetary policy in the coming months as it stepped up efforts to curb the highest inflation in the United States in 40 years.
At the end of its two-day policy meeting, the Federal Open Market Committee on Wednesday raised its reference rate to a new target range of 1.50% to 1.75%, noting in a statement that it “expects continued increases in the target range will be appropriate. “
The decision marks a sharp reversal of the Fed’s previously telegraphed plans for a second consecutive increase in interest rates by 0.50 percentage points, which was explicitly signaled by politicians before the planned “eclipse” period before the meeting, during which their public communications are limited.
Esther George, president of the Kansas City Central Bank branch, was the only dissident and instead supported adherence to the Fed’s previous guidelines.
The increase comes after two alarming reports released on Friday showed an unexpectedly large jump in consumer prices in May and a worrying rise in inflation expectations, suggesting that Americans are becoming increasingly concerned about the economic outlook.
“The committee is extremely vigilant about inflation risks,” the Fed said in a statement, noting that Russia’s invasion of Ukraine had created “additional upward pressure” on inflation and weighed on economic activity. He also added that prolonged blockades in China to combat Covid-19 jumps are exacerbating supply chain disruptions that have helped raise prices.
US central bank officials also sharply raised their interest rate forecasts on Wednesday from three months ago, when they had forecast federal funds to reach 1.9% by the end of the year and 2.8% in 2023. .
The “timeline” of individual interest rate projections now suggests that interest rates will rise to 3.4% by the end of 2022, a level that suggests the Fed could apply at least one more increase of 0.75 percent. points this year and a few half-point corrections before moderation to a more typical rhythm of a quarter point.
Additional interest rate increases are also expected in 2023, with officials saying the interest rate could reach 3.8 percent. In particular, the average forecast for the interest rate on federal funds in 2024 is 3.4%, which suggests that the Fed will have to reverse its current rise in interest rates, recognizing the fact that the economy is likely to have slowed significantly to this moment.
Along with the points chart, the Fed has published new economic forecasts that more directly show that the upcoming monetary tightening – which also includes a $ 9 trillion balance sheet cut – will involve “some pain,” as Jay Powell, the Fed’s chairman, acknowledged. last month.
It is now projected that annual gross domestic product growth will slow to 1.7% by the end of this year and will maintain this level in 2023, according to the median economic estimates of senior officials. In March, they predicted that the economy would grow by 2 percent or more each year by 2024.
Fed officials now expect core inflation to stand at 4.3% this year and 2.7% in 2023, slightly higher than forecast in March. Reflecting on the impact of the tightening policy, the unemployment rate is projected to rise more than 3.5 per cent of officials in March, who noted by the end of next year. It is now projected to reach 3.9% in 2023 and 4.1% in 2024. It is currently 3.6%.
The Fed is not alone in its efforts to tackle inflation, which has become a global phenomenon. Central banks in developed and emerging economies are rapidly raising interest rates in the short term, planning to do more this year.
Since then, however, the European Central Bank has been forced to refine its policy. On Wednesday, it convened an emergency meeting of its interest rate setters, at which it announced new emergency measures to tackle rising borrowing costs in the weaker eurozone economies.
US financial markets lost ground quickly after the statement was released, with the S&P 500 benchmark reversing most of its gains earlier in the day. The stock market indicator increased by 0.4% in the minutes after publication.
The US dollar bond market of 23 trillion. the dollar was also mixed as traders mastered the solution. The yield on the 10-year banknote, which determines borrowing costs worldwide, was 0.04 percentage points lower for the day by 3.43 percent, compared to the low 3.35 percent earlier in the session. Yields rise when bond prices fall.
There were other indications that investors had taken new forecasts from the US Federal Reserve to reinforce their view that economic growth was slowing. The yield curve briefly reversed on Wednesday, a signal some investors expect for an impending recession.
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