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

The Federal Reserve raised its benchmark policy rate by half a percentage point on Wednesday, signaling its intention to tighten the U.S. economy next year, as central banks on both sides of the Atlantic battle inflation. Entering a new phase.

At its final meeting of the year, the Federal Open Market Committee voted unanimously to raise the federal funds rate to a target range of 4.25 percent to 4.5 percent, ending a month-long streak of 0.75 percentage point rate hikes.

The axis of small rate hikes is likely to follow globally, with both the European Central Bank and the Bank of England raising borrowing costs by half a percentage point on Thursday.

Economists say inflation has risen in all three regions with headline rate cuts in the US and UK this week, but central banks are worried it will take longer to come down to their 2 percent target.

In a press conference after the decision, Fed Chairman Jay Paul said: “We have covered a lot of ground and the full impact of our rapid tightening has not yet been felt. We have more work to do.”

Powell welcomed the slowdown in headline rate growth in October and November but warned “it will take significantly more evidence to believe that inflation is on a sustained downward path”.

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In its statement, the Fed said that “ongoing increases” in the policy rate would be “appropriate” to ensure that it is controlling the economy sufficiently to control rate growth.

As Powell spoke at his press conference, US stocks fell to session lows, with the S&P 500 down 0.8 percent and the Nasdaq Composite down 1 percent. Two-year Treasury yields, which move in line with interest rate expectations, rose 0.03 percentage points to 4.2 percent.

Jay Berry, co-head of U.S. rates strategy at JPMorgan, said that ahead of the decision investors had debated whether the Fed would abandon the “ongoing hike” language in favor of something more sinister.

Barry added that sticking with the sentences “suggests that we are a few sessions away from the end of the tough period”.

Along with the rate decision, the Fed released a revised “date plot” of officials’ individual interest rate estimates, which indicated support for further tightening next year.

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The average estimate for the fund’s rate at the end of 2023 rose to 5.1 percent, up from the top estimate of 4.6 percent that was last projected in September. This suggests that the price upside of 0.75 points is still there.

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Most officials now see the policy rate falling to 4.1 percent in 2024 and 3.1 percent in 2025. This compares with 3.9 percent and 2.9 percent, respectively, three months ago.

However, Powell noted that Fed officials have consistently raised their forecasts for higher interest rates and warned: “I can’t tell you with any certainty that we won’t raise our forecast . . . again.” “

Policymakers raised their forecast for inflation next year, with the median estimate for the core personal consumption expenditure price index — their preferred inflation measure — rising to 3.5 percent, up from 3.1 percent in September.

By 2024, most officials estimate it will fall to just 2.5 percent, still above the central bank’s target. It is expected to drop to 2.1 percent next year.

Reflecting officials’ expectations that they will need to push the economy harder than ever before, policymakers were more upbeat about the outlook. The economy will grow by just 0.5 percent in 2023 before registering a 1.6 percent expansion in 2024 as the unemployment rate climbs to 4.6 percent.

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In September, most officials forecast economic growth of 1.2 percent for 2023 and then an increase of 1.7 percent in 2024, with the unemployment rate rising to 4.4 percent.

The December meeting marks an important milestone for the Fed, which this year began its toughest effort to tighten monetary policy since the early 1980s. As central bank actions begin to have a significant impact on the economy, a debate has arisen over how much more restraint is needed to curb inflationary pressures that remain high in many sectors.

Powell has previously said it will take “a lot more evidence” than a month’s worth of data for the central bank to be sure inflation is actually falling, recalling past periods when better-than-expected data have been the latest. followed by increases.

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U.S. home prices fell from their recent highs as mortgage rates rose, the manufacturing sector flagged and consumer sentiment remained subdued.

However, the labor market continues to show resilience. The unemployment rate is still at a historically low 3.7 percent and wages have risen sharply amid a severe labor shortage, accelerating the pace officials warn of the risks of further price pressures.

Paul recently said that it is “very plausible” that the Fed can reduce inflation without causing a recession. However, a new poll conducted by the Financial Times casts doubt on this outcome. Of the economists surveyed, 85 percent expect a recession next year.

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