Daily Management Review

US Fed's Powell Pledges To "Keep At It" After It Announces Another Significant Rate Hike


US Fed's Powell Pledges To "Keep At It" After It Announces Another Significant Rate Hike
As the US central bank increased interest rates by 0.75 per cent for the third time in a row and hinted that borrowing costs would continue to rise this year, Federal Reserve Chair Jerome Powell vowed that he and his fellow policymakers would "keep at" their fight to contain inflation.
In a sobering new set of projections, the Fed sees unemployment rising to levels historically associated with recessions, the economy slowing to a crawl, and its policy rate rising at a faster rate and to a higher level than anticipated.
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Powell was direct about the "pain" to come, citing rising unemployment and highlighting the housing market as likely in need of a "correction," as it has consistently been a source of rising consumer inflation. View More
The National Association of Realtors reported earlier on Wednesday that existing home sales in the United States fell for a seventh consecutive month in August.
The United States has had a "red hot housing market ... There was a big imbalance," Powell said in a news conference after Fed policymakers unanimously agreed to raise the central bank's benchmark overnight interest rate to a range of 3.00 per cent-3.25 per cent. "What we need is supply and demand to get better aligned ... We probably in the housing market have to go through a correction to get back to that place."
The continuing discrepancy between US demand for goods and services and the nation's capacity to produce or import them was the main theme of Powell's briefing, which maintained the hawkish tenor of his remarks from last month's Jackson Hole central banking conference in Wyoming.
Despite the Fed's aggressive tightening (it also announced 75-basis-point rate hikes in June and July), recent inflation data have shown little to no improvement, and the labor market remains robust with wages rising as well.
According to forecasts, the federal funds rate will increase by another 1.25 percentage points over the course of the Fed's final two policy meetings in 2022, which would amount to an additional 75 basis points.
"The committee is strongly committed to returning inflation to its 2 per cent objective," the central bank's rate-setting Federal Open Market Committee said in its policy statement after the end of a two-day policy meeting.
"Continuous increases in the target range will be appropriate," the Fed says.
The Fed's target policy rate is currently at its highest level since 2008; according to new projections, it will reach a range of 4.25 per cent–4.50 per cent by the end of this year and 4.50 per cent–4.75 per cent by the end of 2023.
The Fed was "strongly resolved," according to Powell, to lower inflation from its highest levels in four decades. Powell added that officials would "keep at it until the job is done" even at the risk of higher unemployment and sluggish growth.
"We have got to get inflation behind us," Powell told reporters. "I wish there were a painless way to do that. There isn't."
By the Fed's preferred metric, inflation has been exceeding the target set by the institution by more than three times. The Fed will have to fight for a long time to stop the highest inflation wave since the 1980s, according to the new projections, which could bring the economy dangerously close to entering a recession.
Despite the fact that the Fed stated that "recent indicators point to modest growth in spending and production," the new projections place year-end economic growth for 2022 at 0.2 per cent, rising to 1.2 per cent in 2023, well below the economy's potential growth rate. The unemployment rate, which is currently 3.7 per cent, is anticipated to increase to 3.8 per cent this year and to 4.4 per cent in 2023. That would be higher than the increase in unemployment of 0.5 percentage points previously linked to recessions.  
"The Fed was late to recognize inflation, late to start raising interest rates, and late to start unwinding bond purchases. They've been playing catch-up ever since. And they're not done yet," said Greg McBride, chief financial analyst at Bankrate.
The S&P 500 index fell 1.8 per cent as US stocks, already mired in a bear market due to worries about the Fed's tightening of monetary policy, ended the day sharply lower.
The yield on the 2-year note soared above 4 per cent, reaching its highest levels since 2007, in the U.S. Treasury market, which is crucial in the transmission of Fed policy decisions into the real economy.
With a gain of more than 1 per cent, the dollar reached a new two-decade high against a basket of currencies. The strength of the US dollar, which has increased by more than 16 per cent year to date, has caused central banks all over the world to worry about possible exchange rate and other financial shocks.
The Bank of Japan is expected to stick to its ultra-easy policy and maintain its policy rate at minus 0.1 percent on Thursday, making it the last major monetary policy authority in the world with a negative policy rate. Some are not even attempting to match the Fed's blistering pace of tightening.
Others are trying to keep up with the Fed in some way. For instance, it is anticipated that the Bank of England will increase its policy rate by at least 0.5 percentage points on Thursday.