US Federal Reserve hikes interest rates by 0.75 per cent despite recession fears
The United States has again aggressively hiked interests rates — as central banks around the world respond to surging inflation.
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The US Federal Reserve imposed the latest in a series of sharp interest rate hikes on Wednesday in a sign that policymakers aren’t backing down from an aggressive campaign to lower decades-high inflation.
The rate-making Federal Open Market Committee (FOMC) hiked the nation’s benchmark interest rate by 0.75 per cent, or 75 basis points, at the end of a two-day meeting. The latest increase moved the Fed’s target range to between 3 per cent and 3.25 per cent, the New York Post reports.
Central banks around the world are hiking rates quickly in response to burgeoning inflation, which the World Bank has warned could trigger a global recession in 2023.
Fed Chair Jerome Powell acknowledged that the rate hikes had contributed to “declining activity of all different kinds” in the US housing market and were likely to cause “relatively modest” increases in unemployment.
US Senator Elizabeth Warren slammed the move, describing the move as an “extreme interest rate hike.”
“I’ve been warning that [US Federal Reserve Chairman Jerome] Powell’s Fed would throw millions of Americans out of work — and I fear he’s already on the path to doing so,” she wrote on social media.
.@federalreserve’s Chair Powell just announced another extreme interest rate hike while forecasting higher unemployment.
— Elizabeth Warren (@SenWarren) September 21, 2022
I’ve been warning that Chair Powell’s Fed would throw millions of Americans out of work — and I fear he’s already on the path to doing so.
Global Central Bank Update:
— Charlie Bilello (@charliebilello) September 21, 2022
-The Fed hiked rates for the 5th time this year, 75 bps increase to 3.00-3.25%. This is now the highest Fed Funds Rate since January 2008. pic.twitter.com/PRwDWujoRB
A table posted to social media by Compound Capital Advisors CEO Charlie Bilello shows in stark detail how central banks around the world are responding to inflation by hiking interest rates.
The World Bank said central banks were moving “with a degree of synchronicity not seen over the past five decades” as it warned of an economic crisis.
China, Japan and Russia are among the few countries to cut rates recently.
More rate rises expected
In a statement after the meeting, the FOMC said it “anticipates that ongoing increases in the target range will be appropriate” — an indication that the Fed isn’t done hiking interest rates.
“Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low,” the FOMC said. “Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.”
Fed officials have now hiked the benchmark rate by three-quarters of a percentage point for three consecutive meetings. The three-quarter-point hikes are the first of their kind since 1994 — an indication of the Fed’s urgent desire to bring prices lower.
Speaking a post-meeting press conference, Mr Powell said the FOMC would hike its benchmark rate to a “restrictive level” and “keep it there for some time.” Current Fed projections call for a 4.25 per cent to 4.50 per cent rate by the end of the year.
“My main message has not changed at all since Jackson Hole,” Mr Powell said, referencing a hawkish speech he delivered at a Fed event last month.
“The FOMC is strongly resolved to bring inflation down to 2 per cent and we will keep at it until the job is done,” he added.
The Fed signalled it expects inflation tracked in the personal consumption expenditure price index – its preferred gauge – to fall to 5.4 per cent by the end of this year and reach its 2 per cent target by 2025.
Unemployment expected to rise in US
The median projection among Fed officials showed an expectation that unemployment could rise to 4.4 per cent by the end of 2023. As of August, the unemployment rate was 3.7 per cent.
The Fed would look for several key signs, including below-trend economic growth, better balance between supply and demand in the labour market and “compelling” evidence that inflation was falling, before considering a pivot.
Prior to the FOMC’s announcement, investors were pricing in an 82 per cent probability of a three-quarter-percentage-point hike and an 18 per cent probability of a full-point hike. Yields on two-year Treasury notes spiked above 4 per cent on the expectation of another hike.
The Fed was widely expected to implement another sharp rate hike following a dismal August Consumer Price Index that renewed fears about persistent inflation. That’s despite mounting fears among investors that the Fed will be unable to achieve a “soft landing” and will instead tip the economy into a recession with its policy tightening.
Stocks have touched fresh lows in recent days as investors brace for an economic downturn.
The Fed’s benchmark interest has direct and indirect effects that ripple throughout the broader economy. Hikes impact credit card interest rates, savings accounts, auto loans and other forms of borrowing.
They also influence mortgage rates, which have surged above 6 per cent for the first time since 2008 and have triggered a slowdown in the housing market.
Some critics, including billionaire Elon Musk and “Bond King” Jeffrey Gundlach, argue the Fed risks causing destructive deflation by continuing forward with rate hikes despite signs of a slowing economy.
“The Federal Reserve is likely tightening policy straight into the teeth of a recession. Many stock investors are hoping for a dovish pivot, but the stock market’s addiction to Fed easing when stocks decline may be what Jerome Powell is aiming to quash by aggressively hiking rates, in addition to inflation,” said Quill Intelligence chief executive and chief strategist Danielle DiMartino Booth.
Prices rose by a hotter-than-expected 8.3 per cent in August, while core inflation, a measure that excludes volatile food and energy prices, jumped by 6.3 per cent. Inflation is much higher than the 2 per cent range that the Fed and Treasury Department deem acceptable.
The troubling federal data led some analysts to predict the Fed would implement a full-point hike for the first time in several decades.
Even before the August CPI was released, top policymakers, including Fed Chair Jerome Powell, were indicating aggressive rate hikes were in store for the US economy.
During a speech earlier this month, Powell acknowledged the Fed was aware of the risk of “prematurely loosening policy.” He added the central bank was “strongly committed to this project and we will keep at it until the job his done.”
Powell has warned that hikes would continue even if it resulted in “some pain” for US households — including an increase in the national unemployment rate.
In a separate address, Fed Vice Chair Lael Brainard said officials were committed to tightened policy conditions “for as long as it takes to get inflation down.”
RBA to continue rate hikes into 2023
Meanwhile, Australian homeowners have been warned that interest rate rises will likely continue.
In September, the Reserve Bank of Australia increased the official cash rate by 50 basis points, to 2.35 per cent in it’s fifth hike this year. Currently interest rates are at their highest level since December 2014, with the most recent rate rises marking the first time it’s been above 2 per cent since April 2016.
However economists believe the worrying trend will continue.
Westpac chief economist Bill Evans forecasted another 0.5 per cent rise in October, before the RBA slows to 0.25 per cent hikes in November, December and February.
“Clear evidence of the expected slowdown in inflation will not be apparent until late February, allowing the RBA to go on hold in March on evidence that growth is slowing and that inflation and rates have also peaked in the US,” he said.
– With the New York Post
Originally published as US Federal Reserve hikes interest rates by 0.75 per cent despite recession fears
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