The Fed is accelerating rate hikes, forecasting economic slowdowns, market news

Howard Schneider and Anne Sapphire

WASHINGTON, June 15 (Reuters) – The US Federal Reserve raised its key interest rate by three-quarters on Wednesday in a bid to regain control of inflation and said it expected inflation to slow. unemployment in the coming months.

This rate hike, the largest by the United States central bank since 1994, has come after several recent publications suggesting that fighting inflation, which has become a priority for the Fed and the White House, has made so little progress.

Consumer price growth in May reached 8.6% in one year, the highest level since 1981, and the household morale index, which was closely monitored, fell to its historic low.

“Inflation remains high, reflecting the imbalance between supply and demand due to the pandemic, rising energy prices and broader price pressures,” the Fed said in a statement after two days of debate.

“The Committee is determined to return inflation to its 2% target.”

The statement reiterated that the war in Ukraine and the containment policy in China were causing additional inflationary pressures.

Members of the Federal Open Market Committee (FOMC), the Fed’s monetary policy committee, “concluded” that they should accelerate the return of interest rates to a more neutral level, said Fed Chairman Jerome Powell. press conference.

GROWTH COMMONS, UNEMPLOYMENT INCREASES

“Seventy-five basis points seemed right at this meeting, and we did,” he said.

Jerome Powell added that at the next meeting in late July, the FOMC will likely have to choose between an increase of half a point or three quarters, emphasizing that he expects an increase of only 75 basis points, which becomes “normal”.

The increase, approved on Wednesday, leads to a target rate of federal funds to 1.50% -1.75%, and the average forecast of FOMC members now gives a rate of 3.4% at the end of the month and 3.8% in 2023, while their the March forecast is only 1.9% in December this year.

The Fed has also downgraded its economic outlook, saying it now expects growth to slow to 1.7% this year and unemployment to be 3.7% at the end of the year and then to 4.1% by 2024, which will be higher. than the central level. the bank believes that it corresponds to full employment.

The Fed DOES NOT EXPECT A RECESSION

Although no FOMC member predicts a recession, their forecasts point to weak growth in 2023 and lower interest rates as early as 2024.

At the same time, PCE inflation is expected to reach 5.2% this year and then gradually return to 2.2% in 2024.

“The Fed is ready to allow rising unemployment and risk a recession as a side effect of lowering inflation,” said Brian Jacobsen, senior strategist at Allspring Global Investments.

However, Jerome Powell clarified that the central bank did not aim to provoke a recession.

In the financial markets, the Standard & Poor’s 500 index briefly slowed immediately after the release of the Monetary Policy Report, but recovered after Jerome Powell’s statements and rose 1.94% less than half an hour after closing.

At the same time, the yield on ten-year treasury bills fell by almost 14 basis points to 3.3448%, and the dollar lost 0.76% against other major currencies.

At the same time, interest rate futures markets reflected an approximately 85% probability of another rate hike for the next three quarters of the month, but supported the hypothesis of a half-point increase in September.

Fed Chairman Kansas City Esther George is the only FOMC member to vote against raising the rate by 75 basis points on Wednesday after calling for an increase of 50 basis points. (Report by Howard Schneider and Anne Sapphire, French version by Marc Angran, edited by Jean-Stefan Brosse and Jean Terzian)