On Wednesday, the Federal Reserve launched the biggest broadside ballad ever against inflation, raising benchmark rates by three-quarters percentage points. Most aggressive hiking since 1994..
After several weeks of speculation, the Federal Open Markets Commission for Interest Rate Setting has raised the level of benchmark fund interest rates to the range of 1.5% to 1.75%. This was the best since just before. Covid pandemic It started in March 2020.
After the decision, the stock price fluctuated, Higher, as Federal Reserve Chair Jerome Powell said at a post-meeting press conference.
“Obviously, the increase of 75 basis points today is extraordinarily large, and I don’t think this size movement is common,” Powell said. However, he added that he expects to see an increase of 50 or 75 basis points at the July meeting. He said the decision was made at a “meeting by meeting” and the Fed “continues to convey our intentions as clearly as possible.”
“We want to see progress. Inflation cannot go down until it flattens,” Powell said. “If no progress is seen … it can cause us to react. Soon we will see some progress.”
Members of the FOMC have shown a much stronger path to rate hikes to stop inflation from moving at the fastest pace dating back to December 1981, according to one commonly cited indicator. rice field.
According to the midpoint of the expected target range of individual members, the Fed’s benchmark rate will be 3.4% at the end of the year. This is compared to the 1.5 percentage point upward revision from the March estimate. The Commission then confirms that it will rise to 3.8% in 2023. This is a completely higher percentage point than expected in March.
Officials have also significantly lowered their outlook for economic growth in 2022, currently expecting GDP to increase by just 1.7% from 2.8% in March.
Inflation forecasts measured by consumer spending also rose from 4.3% to 5.2% this year, but core inflation, excluding sharply rising food and energy costs, was shown to be 4.3%, up just 0.2 points from previous forecasts. did. Core PCE inflation ran at 4.9% in April, so Wednesday’s forecast expects price pressure to ease in the coming months.
Committee statement Even with higher inflation, most of the economy has drawn optimism.
“Overall economic activity seems to have recovered after the fall in the first quarter,” the statement said. “Employment growth has been strong in recent months and unemployment remains low. Inflation remains rising, reflecting supply-demand imbalances associated with pandemics, rising energy prices and rising price pressures.”
Indeed, estimates expressed through the Commission’s summary of economic forecasts show that inflation fell sharply in 2023, headlines dropped to 2.6%, cores dropped to 2.7%, and expectations remained almost unchanged from March. ..
In the long run, the Commission’s policy outlook is in line with market forecasts, which are expected to rise in series to about 3.8%, the highest level since late 2007.
This statement has been approved by all FOMC members except Kansas City Federal Reserve Bank of Kansas Governor Esther George.
Banks use rates as a benchmark for the amount of money they charge each other for short-term loans. However, it feeds directly on a number of consumer debt products such as floating rate mortgages, credit cards and car loans.
Federal funds rates can also raise interest rates on savings accounts and CDs, but their feedthroughs are generally time consuming.
The Fed’s move Inflation running at the fastest pace In over 40 years. Central bank officials try to slow down the economy by using interest rates on funds. In this case, we will curb demand so that supply can catch up.
However, a post-meeting statement removed the long-used phrase that the FOMC “expects inflation to return to its 2% target and the labor market to remain strong.” The statement simply stated that the Fed was “strongly committed” to its goals.
Policy tightening is taking place with economic growth already slowing while prices are still rising, a condition known as stagflation.
Growth in the first quarter declined at an annual rate of 1.5%, and estimates updated via the GDP Now tracker from the Atlanta Federation on Wednesday were flat in the second quarter. Two consecutive quarters of negative growth is a widely used rule of thumb to describe a recession.
The Federal Reserve has engaged in a public hand-kneading match towards Wednesday’s decision.
For weeks, policymakers have argued that a rise in half points (or 50 basis points) could help stop inflation. But recently, CNBC and other media have reported that the Fed is in place to go beyond that. Powell in May made a change in approach, even though he claimed that a 75 basis point increase was not considered.
However, a recent series of alarm signals has triggered more aggressive behavior.
Inflation, measured by the Consumer Price Index, rose 8.6% on an annual basis in May. The University of Michigan Consumer Psychology Survey hit a record low, including sharply high inflation expectations. In addition, retail sales released Wednesday confirmed that sales in the month of 1% rise in inflation fell 0.3%, weakening the most important consumers.
May’s profits of 390,000 were the lowest since April 2021, but the employment market was an economic strength. Average hourly wages are nominally rising, but have fallen by 3% over the past year, adjusted for inflation.
The Commission’s forecast released Wednesday shows that the unemployment rate is currently 3.6% and is expected to rise to 4.1% by 2024.
All of these factors combine to complicate Powell’s hopes for a “soft or soft” landing announced in May. Past interest rate tightening cycles have often led to recessions.
Correction: Core PCE inflation ran at 4.9% in April. In previous versions, that month was wrong.
The Fed raises the benchmark interest rate by 0.75 percentage points. This is the largest rise since 1994.
Source link The Fed raises the benchmark interest rate by 0.75 percentage points. This is the largest rise since 1994.