Fed accelerates rate hike, predicts economic slowdown, market news

Howard Schneider and Ann Sapphire

WASHINGTON, June 15 (Reuters) – The US Federal Reserve (Fed) on Wednesday raised its key interest rate by three-quarters of a point in an attempt to regain control of inflation and said it expected it to slow and rise. unemployed in the coming months.

This rate hike, the largest decision by the United States central bank since 1994, comes after the release in recent days of several indicators showing that fighting inflation, which has become a priority for the Fed and the White House, has so far made little progress.

Consumer price growth hit a notable 8.6% year-over-year in May, the highest level since 1981, and the closely monitored Household Morale Index fell to its all-time low.

“Inflation remains elevated, reflecting supply and demand imbalances associated with the pandemic, rising energy prices and broader price pressures,” the Fed said in a statement released after two days of debate.

“The Committee is committed to bringing inflation back to its 2% target.”

The statement confirms that the war in Ukraine and containment of China are causing additional inflationary pressure.

Members of the Federal Open Market Committee (FOMC), the Fed’s monetary policy committee, “have come to the conclusion” that they must accelerate the return of interest rates to a more neutral level, Fed Chairman Jerome Powell explained at a news conference.

GROWTH SLOWS, UNEMPLOYMENT IS RISE

“Seventy-five basis points seemed right to me at this meeting, and we did,” he said.

Jerome Powell added that the FOMC will “most likely” have to choose between a half-point or three-quarters point increase at its next meeting in late July, stressing that he expected only a 75 basis point increase to be “routine”. .

The hike, passed on Wednesday, raises the target federal funds rate to 1.50% to 1.75%, with the FOMC members’ median forecast now for a rate of 3.4% at the end of the month and 3.8% in 2023, while their March forecast suggested it was only 1.9% in December of this year.

The Fed also cut its economic forecasts, saying it now expects growth to slow to 1.7% this year and the unemployment rate to 3.7% at the end of the year and then to 4.1% by 2024, above the level set by the central bank. the bank considers corresponding to full employment.

Fed DOES NOT EXPECT RECESSION

While no FOMC member sees a recession, their forecasts point to weak growth in 2023 and lower interest rates as early as 2024.

At the same time, the PCE inflation rate is expected to reach 5.2% this year and then gradually return to 2.2% in 2024.

“The Fed is willing to let unemployment rise and risk recession as a collateral damage to lower inflation,” said Brian Jacobsen, senior strategist at Allspring Global Investments.

However, Jerome Powell clarified that the central bank did not seek to provoke a recession.

In financial markets, the Standard & Poor’s 500 index briefly cut gains immediately after the release of the monetary policy statement, but recovered from Jerome Powell’s statements and rose 1.94% less than half an hour before the close.

At the same time, 10-year Treasury bill yields fell nearly 14 basis points to 3.3448%, while the dollar lost 0.76% against other major currencies.

At the same time, interest rate futures markets reflected an implied 85 percent chance of another three-quarter-point rate hike next month, but supported the hypothesis of a hike limited to half a point in September.

Kansas City Regional Fed Chair Esther George is the only FOMC member to vote against a 75 basis point rate hike on Wednesday after advocating a 50 basis point hike. (Report by Howard Schneider and Ann Sapphire, French version by Marc Angrand, edited by Jean-Stephan Brosse and Jean Tertian)