The Federal Reserve hiked rates 75bps as expected, bringing the fed funds rate above 3% for the first time since 2008, as inflationary pressures are more persistent than the bank expected. High inflation keeps the door wide open for a fourth consecutive 75bp hike in November, followed by a 50 bps hike in December.
“The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 3 to 3-1/4 percent and anticipates that ongoing increases in the target range will be appropriate.” The policy statement revealed.
The Federal Reserve pledged to take all necessary measures to bring down inflation, which is currently running near its highest levels since the 1980s.
During the press conference, Fed Chair Jerome Powell said in the opening statement that “The economy does not work for anyone without price stability” adding that the “US economy has slowed from 2021”.
The US dollar index marched higher above 111.8 on Thursday, the highest levels in 20 years, following the third consecutive 75bps rate hike and the very hawkish outlook for rates.
According to the updated dot plot, Fed officials are now expecting rates to peak at 4.6% next year with no rate cuts anticipated until 2024. These forecasts violate market speculations that the Federal Reserve could ease policy in 2023 as the recession seems inevitable. The dot plot shows the median rate at the end of 2022 at 4.4%, up from 3.4% in June 2022. The median Fed fund target rate was revised up to 4.6% for 2023 and 3.9% for 2024 from 3.8% and 3.4% respectively in June. While the initial median forecast for 2025 is seen at 2.9%.
On the economic front, the Fed does not expect inflation to return back to target 2% until 2025. The following are the highlights of the FOMC economic projections:
PCE inflation Median Forecasts:
- Revised up to 5.4% from 5.2% for 2022.
- Revised up to 2.8% from 2.6% for 2023.
- Revised up to 2.3% from 2.2% for 2024.
- Stands at 2% for 2025%
GDP Median Forecasts:
The bank lowered GDP forecasts till 2024 as follows:
- 2022 GDP is now seen at 0.2% from 1.7% in June.
- For 2023, GDP is expected at 1.2% vs. 1.7% in June.
- For 2024, GDP is seen at 1.7% vs. 1.9% in June.
The committee anticipates higher unemployment to reach 4.6% in 2024, while Core PCE inflation is seen returning to target by 2025 at 2.1%.
Meanwhile, the US dollar benefited from safe-haven flows following Putin’s announcement of a partial military mobilization in Russia, a significant escalation of the conflict in Ukraine.
The greenback jumped to a multi-decade high against the Euro and the British Pound, while trading over two-year highs against the New Zealand and Australian counterparts. Meanwhile, the Japanese Yen fell to a fresh 24-year low against the US dollar as the Bank of Japan maintained its ultra-loose policy, despite the global central banks policy tightening.