The U.S. Federal Reserve added 0.75 percent to its key federal funds interest rate on 21 September, raising it to a range of 3 to 3.25 percent, a level last seen in 2008 during the Great Recession.
It was the third such boost in the Fed’s last three meetings, the central bank’s most aggressive campaign of rate hikes since the 1980s.
“Inflation remains elevated, reflecting supply and demand imbalances related to the [COVID War], higher food and energy prices, and broader price pressures,” the bank’s Open Market Committee said in a statement announcing the higher rate.
The committee’s projections showed that most committee members expect to set the rate to between 4 and 4.25 percent before the end of December and to 4.6 percent before 2025—no longer the 3.8 percent the group had foreseen in its June forecast, The Wall Street Journal reported.
The committee expects to make no rate cuts before at least 2024, according to the Financial Times.
“We have to get inflation behind us,” Fed chair Jerome Powell told a press briefing following the committee’s decision.
“I wish there was a painless way to do that,” he added. “There isn’t.”
Analysts have predicted as many as a million U.S. jobs could be lost as a result of the higher rates coupled with rising inflation.
“No one knows whether this process will lead to a recession or, if so, how significant that recession will be,” Powell said.
“We haven’t given up the idea that we can have a relatively modest increase in unemployment” but “we need to complete this task,” he emphasized.
The Fed has set a target of driving inflation down to 3 percent next year and 2 percent by the end of 2024.
Many analysts say that reaching those goals without doing serious damage to the jobs market is highly unlikely, according to the WSJ.
The new rate sent equity markets on a days-long slide.
The Standard & Poor’s 500 index dropped 66 points, or 1.7 percent, after the news. The yield on two-year treasury notes reached 3.993 percent, climbing from 3.962 the day before and nearing a 15-year high, Tradeweb.com noted.
“There is a message here that rates will stay higher for longer and this message is sticking with market participants,” T. Rowe Price economist Blerina Uruci told the WSJ.
In his briefing, “Powell was trying to keep to a minimum the biggest risks to getting inflation to come down, which is market participants getting ahead of themselves and actually easing financial conditions,” Vincent Reinhart, chief economist at Dreyfus and Mellon, said in a WSJ interview.
Only a year ago, the Fed was indicating it expected to hold its key rate to around 0.25 percent for at least another 12 months. It also was continuing to buy treasury and mortgage bonds at the rate of $120 billion a month.
Now rates have risen in five consecutive Fed meetings, the fastest since the 1980s, the WSJ said.
Last week, the central banks of Norway, Switzerland, and the U.K. also raised their key rates.
TREND FORECAST: After inflation began picking up speed, the Fed delayed far too long in beginning to raise interest rates to protect the jobs market.
Now the Fed has delayed far too long in admitting that a recession is probable.
For several months, we have warned of a recession’s increasing likelihood in articles such as “Yield Curve Inverts for First Time in 16 Years, Hinting at Recession” (29 Mar 2022) and “Recession Coming? Former Fed Vice-Chair Says Yes” (10 May 2022), among others.
Now, as economies are stumbling and banks are raising interest rates around the world, recession is knocking on the door.
The Fed, the International Monetary Fund, the World Bank, and other agencies are chipping away at their growth forecasts for the balance of this year and next.
Those forecasts are backward-looking, based on data being collected now from past events.
Data we see now, in real time—from Britain, from the European Union, from China, from the U.S.—all point toward a crumbling global economy that will be in turmoil at best, and a disastrous recession at worst, for the balance of 2022 and well into 2023.
While we forecast deep economic pain, Kristalina Georgieva, managing director of the International Monetary Fund, to an extent, agrees with our forecast: even if 2023 manages to avoid a worldwide recession, it still will feel like one. (See “2023 Will Feel Like a Recession Even Without One, IMF Chief Says” in this issue.)