Members of the Federal Open Market Committee (FOMC) of the United States Federal Reserve (Fed) decided on Wednesday to raise the federal funds rate by an additional 75 basis points, for the third consecutive time.
Since March of this year, the central body has accumulated 300 basis points, the fastest rate pace on record. Following this rise, the benchmark is currently in a range of 3.0-3.25%, compared to 2.25-2.5% previously.
With that, the fed funds rate hit its highest level since January 2008, and the fastest pace in rates since all-time highs also materialized, as on no other occasion did the Fed raise the index. benchmark by 75 basis points in three consecutive installments.
Moreover, the central bank has adopted a more restrictive tone, so the cycle of hikes is still far from over and higher levels are expected for the end of this year and for 2023, at the same time as it adjusted its inflation forecasts upwards and cut growth expectations sharply.
During a press conference, Fed Chairman Jerome Powellreaffirmed a commitment to fight inflation, for which he said rate hikes would continue until inflation returned to the 2% target.
“We have just moved to the lowest level of what could be considered restrictive, and certainly in my opinion and the opinion of the Committee is that there is still a long way to go,” he said.
However, he pointed out that with monetary policy tightening, the pace of rate hikes may slow. “At some point, when monetary policy tightens further, it will be appropriate to slow the increases,” he said.
The market was already discounting this increase, after US central bank president Jerome Powell made it clear that he would do everything possible to ease the inflationary pressures seen recently.
In August, the consumer price index recorded an annual increase of 8.3%, which implies a clear improvement compared to the 9.1 and 8.5% recorded respectively in June and July; however, inflation in the US Union continues at levels not seen in just over four decades.
Given this complex inflation scenario, the market is already betting that the Fed would close with a rate above 3.5% this year.
Recession at the door: the Fed estimates that in 2022, the American GDP will only increase by 0.2%
The US Federal Reserve (Fed) adjusted its growth estimates on Wednesday, alongside a new monetary policy announcement.
According to the agency, for this year the US economy would only grow by 0.2%and which contrasts with the 1.7% projected in June.
For 2023, a 1.2% advance is expected, down 50 basis points from the previous 1.7%.
He also forecasts that headline inflation will end this year at 5.4%, down from the 5.2 estimated two months ago.
It is because of these factors that 18 of the 19 members of the Committee estimated that the federal funds rate would close this year above 4%.
On the other hand, the dot chart indicates that the interest rate would end this year 2022 in a range of 4.25 to 4.5%, which implies an additional increase of 1.25 points from its current level. .
For next year, some members of the Open Market Committee see the rate in the range of 4.75 to 5.0%. That would be until 2024, when less levels are seen in the fed funds rate.
Powell added that an episode of recession cannot be ruled out due to the restrictive stance adopted by the Fed: “No one knows if this process will lead to a recession,” he stressed.
Gabriel Casillas, Barclays chief economist for Latin America, pointed out that the Fed itself had updated its funding rate projections upward. “It’s a very strong message of commitment to reducing inflation,” he said.
Alejandra Marcos, director of analysis and strategy at Intercam, also stressed that the central body will not let go until inflation is under control.
“The dot chart, where the various members of the Committee expressly express their expectations for the interest rate, indicates that the cycle of hikes is far from over, so that at least another 125 basis points are expected for this year,” he said, adding that it will take until 2024 for the Fed to have any incentive to lower the interest rate.
Fed rates, “eye” on these data: US inflation climbs to 8.3% in August
The inflation the United States was firmer than expected in August, which likely kept the Federal Reserve (Fed) on track for a third consecutive 75 basis point interest rate hike.
The the consumer price index has risen 0.1% from July, after no change the previous month, Labor Department data showed Tuesday. Compared to the previous year, prices increased by 8.3%, a slight slowdown.
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