US Fed lifts rates by 0.75pc for third time; signals more aggressive rate rises by Dec

US central bank chairman Jerome Powell has signalled more rate rises by Christmas and beyond - after his third 0.75 per cent increase - and says the chances of a ‘soft landing’ for the economy are receding.

US Federal Reserve chairman Jerome Powell said chances of a soft economic landing are receding. Picture: Drew Angerer/Getty Images

The US Federal Reserve approved its third consecutive interest-rate rise of 0.75 percentage point and signalled additional large increases were likely at coming meetings as it combats inflation that remains near a 40-year high.

The decision – unanimously supported by the Fed’s 12-member rate-setting committee – will lift its benchmark federal-funds rate to a range of between 3 per cent and 3.25 per cent, a level last seen in early 2008.

Officials’ new projections showed a majority of 19 officials who participated at the Fed’s policy meeting expect to lift the rate at least by another 1.25 percentage point by December, to a range between 4.25 per cent and 4.5 per cent. The Fed has two more meetings this year.

It’s still possible for the Federal Reserve to avoid a recession as it attempts to cool inflation, but it’s becoming less likely, Fed Chairman Jerome Powell said on Wednesday.

“The chances of a soft landing are likely to diminish to the extent that policy has to be more restrictive,” he said following the Fed’s meeting.

But the alternative is worse, he added.

“A failure to restore price stability would lead to greater pain later on,” Mr Powell said.

“We have both the tools we need and the resolve that it will take to restore price stability on behalf of American families and businesses.”

Nearly all officials projected somewhat higher rates would be warranted next year.

The Fed’s policy rate would peak at a range between 4.5 per cent and 4.75 per cent, according to the median projection.

In June, the median projection was for the rate to peak at around 3.75 per cent next year.

Officials’ projections show greater uncertainty over what might happen to rates after that. Around one third of officials expect rates to stay above 4 per cent through 2024, and another third see the Fed cutting rates to between 2.5 per cent and 3.5 per cent in 2024.

The remaining third have rates declining to somewhere in between.

Fed officials are raising rates at the most rapid pace since the 1980s and have approved increases at five consecutive policy meetings, starting in March when they lifted rates from near zero.

Until June, the Fed hadn’t raised rates by 0.75 basis points since 1994.

The central bank has also initiated a program to withdraw stimulus by shrinking its $US8.8 trillion asset portfolio through attrition; the Fed is passively reducing its holdings by up to $US95 billion a month as those securities mature.

US equities fell after volatile trading on the rates lift. Picture: Michael M Santiago/Getty Images

Projections showed that most officials expect higher unemployment over the next year, implying rising recession risks.

The median projection showed officials expect the unemployment rate, which stood at 3.7 per cent in August, could rise to 4.4 per cent at the end of 2023.

That type of increase has seldom occurred without a recession.

Officials revised higher their inflation forecasts over the next year.

They projected so-called core inflation, which excludes volatile food and energy prices, at 4.5 per cent by the end of this year, above their projections of 4.3 per cent in June and 4.1 per cent in March. The Fed seeks average annual inflation of 2 per cent.

“Inflation is running too hot. You don’t need to know much more than that,” said Mr Powell. “If that’s the one thing you know … it’s that this committee is committed to getting to a meaningful, restrictive stance of policy and staying there until we feel confident that inflation is coming down.”

Officials projected core inflation would fall to 3.1 per cent by the end of 2023, up from a projection of 2.7 per cent in June.

Core prices rose 4.6 per cent in July from a year earlier, as measured by the Fed’s preferred gauge, the Commerce Department’s personal-consumption expenditures price index.

Based on more recent data, Wall Street forecasters estimate the measure rose 4.8 per cent in August.

A separate inflation measure released last week, the Labor Department’s core consumer-price index, rose 6.3 per cent in August from a year earlier.

Inflation hasn’t significantly worsened this summer, but it hasn’t improved, either.

Falling fuel prices held down overall inflation in July and August, but climbing housing costs and prices for services such as dental and hospital visits, haircuts and car repairs have kept inflation elevated.

Meantime, the labour market has remained strong despite signs of a slowdown in some parts of the economy.

The fed-funds rate, an overnight rate on lending between banks, influences other consumer and business borrowing costs throughout the economy, including rates on mortgages, credit cards, saving accounts, car loans and corporate debt.

Raising rates typically restrains spending, while cutting rates encourages such borrowing.

Other central banks in wealthy economies, including the UK, Europe, Canada and Australia, have also been raising rates in historically large increments, creating the most rapid tightening in global monetary policy since 1989, according to economists at Credit Suisse.

Markets have stumbled over the past month, beginning in late August when Mr Powell warned that continued rate rises would “bring some pain to households and businesses.” Expectations for tighter policy escalated again after last week’s inflation report, driving yields on the policy sensitive 2-year Treasury note to a 15-year high.

– The Wall Street Journal