WASHINGTON, Sept 21 – The Federal Reserve on Wednesday raised interest rates by three-quarters of a percentage point. It is for the third time in a row and signaled how much more and how quickly borrowing costs might need to rise. To control a potentially corrosive inflation outbreak.
While investors expect the Fed to raise its policy rate by 75 basis points to the 3.00%-3.25% range. Markets could be uneasy about the updated quarterly economic projections. That will be released alongside the policy statement.
If the past few months are a prologue, that rewritten economic script will point to a tougher-than-expected struggle ahead. A federal funds rate that may exceed 4% by the end of 2022, up from the 3.4% expected when the last set of projections was issued in June, and rising unemployment.
“With little evidence at hand that inflationary pressures are easing, (Chairman Jerome Powell) is likely to re-emphasize the Fed’s commitment to do whatever it takes to bring inflation to target. Even if that means risking a recession,” Deutsche Bank economists wrote late last week. “They will… they foresee tighter monetary policy and greater pain in the labor market.”
Deutsche Bank expects the U.S. central bank to need to raise its policy rate to around 5.00%. 5.00% level is approaching the peak of 5.25% seen from mid-2006 to 2007 when Fed policymakers were concerned about a bubble in the U.S. housing market. That could amplify stress across the global financial system.
Powell is scheduled to hold a news conference at 2:30 p.m. to elaborate on the latest policy decision. His tone will shape whether it is interpreted as a hawkish next step with more of the same ahead. Or as a final bit of rate-hike “front-loading” before the Fed reverts to more conventional rate increases of 50 or 25 basis points as it feels its way to a stopping point.
The Fed chief’s tone has since become fiery and aggressive. With the central bank’s preferred measure of inflation exceeding the 2% target, another dose of tough talks is anticipated.
“Risks are still tilting toward higher terminal policy rates. We expect a relatively aggressive FOMC meeting,” Citi economists wrote Tuesday.
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