Powell points out more pain with higher transmission rates

Federal Reserve Chairman Jerome Powell pledged that officials would crush inflation after they raised interest rates by 75 basis points for the third time in a row, and pointed to more robust increases than investors had expected.

We have to keep inflation behind us. I wish there was a painless way to do this. Powell said at a news conference in Washington on Wednesday after officials raised the target for the federal funds rate benchmark to a range of 3 percent to 3.25 percent.

“High interest rates, slow growth and a weak job market are all painful for the audience we serve. But they are not as painful as failing to restore price stability and having to go back and do it all over again.

The S&P 500 stock index finished near session lows — pushing its decline from a record high in January to more than 20 percent. The gauge struggled to find direction in the wake of the Fed’s announcement, rising 1.3 percent at one point. Two-year Treasury yields crossed 4 percent, breaking that level for the first time since 2007. The dollar rose.

Officials expect rates to reach 4.4 percent by the end of this year and 4.6 percent in 2023, a tighter turnaround in their so-called point plot than expected. That means a fourth straight 75 basis point hike may be on the table for the next meeting in November, about a week before the US midterm elections.

The Fed chair agreed that the quarterly average forecast provided by policy makers implied another 125 basis points for tightening this year. But he said that no decision had been made on the size of the price increase at the next meeting, and stressed that a fairly large group of officials favored raising prices by only a percentage point by the end of the year.

Powell said his main message is that he and his colleagues are determined to bring inflation down to the Fed’s 2 per cent target “and they will keep doing that until the job is done.” The phrase was based on the title of former Federal Reserve Chairman Paul Volcker’s memoir “Keeping at It.”

We’ve written what we think is a reasonable path for the federal funds rate. He said that the course we are already implementing will be sufficient – it will be sufficient to restore price stability. This was a strong signal that officials would not hesitate to raise interest rates by more than they currently expect if that is what it takes to cool inflation.

Their forecast showed rates falling to 3.9 percent in 2024 and 2.9 percent in 2025.

“This is Powell’s last throw of the dice and he’s still going,” said Derek Tang, an economist at LH Meyer in Washington. “The forecast of high unemployment is a fair warning that it will hurt and this is just beginning.”

The updated forecast showed the unemployment rate rising to 4.4 percent by the end of next year and the same at the end of 2024 – up from 3.9 percent and 4.1 percent respectively in the June forecast.

The Fed’s quarterly outlook, which showed a steeper rate trajectory than officials announced in June, underscores the Fed’s determination to cool inflation despite the risk that higher borrowing costs could push the US into recession. Interest rate futures showed that investors betting on interest rates will peak around 4.6 percent in early 2023.

What Bloomberg Says About Economics…

More important than the 75 basis point rate hike at the FOMC September 20-21 meeting was the shift in the committee’s views in the updated Summary of Economic Outlook. Nearly two-thirds of members now see rates peaking next year even higher than 4.5 percent set by markets. Bloomberg Economics expects the eventual final rate to be 5 percent.”

– Anna Wong, Andrew Hosby and Elisa Winger (Economists)

Powell and his colleagues, who criticized the initial slow response to escalating price pressures, have turned aggressively to catch up, and are now introducing the tightest policy tightening since the Fed under Volcker four decades ago.

Estimates of economic growth in 2023 have been lowered to 1.2 percent and 1.7 percent in 2024, reflecting a greater impact from monetary tightening.

The inflation rate peaked at 9.1 percent in June, as measured by the 12-month change in the US consumer price index. But it has failed to decline as quickly as Fed officials had hoped in recent months: In August, it was still 8.3 percent.

Meanwhile, job growth remained strong and the unemployment rate, at 3.7 percent, remains below levels most Fed officials consider sustainable over the long term.

The failure of the labor market to soften added to the impetus for a more aggressive tightening path in the US central bank.

The Fed is also being conducted on the back of tightening by other central banks to counteract the price pressures that have escalated around the world. Collectively, about 90 people have raised interest rates this year, and half have increased by at least 75 basis points in a single take.