Jay Powell refused to rule out a recession in the world’s largest economy as the Federal Reserve implemented a third straight 0.75 percentage point hike and released much gloomier forecasts.
Powell’s dovish comment on the economy came as the Federal Open Market Committee on Wednesday raised its benchmark interest rate to a new target range of 3 percent to 3.25 percent, signaling an intention to keep monetary policy tight as it fights rising inflation.
“No one knows if this process will lead to a recession or how significant that recession would be,” Powell said when asked if higher interest rates would hurt the economy. Avoiding such an outcome depends on how quickly wage and price inflation eases and whether the sweltering labor market cools, he added.
“The chances of a soft landing are likely to decrease” because monetary policy needs to be “more restrictive or longer restrictive,” Powell warned during a press conference after the rate hike.
His comments followed the release of a new “dot plot” of interest rate forecasts by Fed officials, who reiterated the central bank’s commitment to a “longer higher” approach. It showed that the policy rate rose to 4.4 percent by the end of this year before peaking at 4.6 percent next year.
The scatter chart was much more hawkish than it was when it was last updated in June. At the time, officials projected that the fed funds rate would reach just 3.4 percent by the end of the year and 3.8 percent in 2023, before declining in 2024
Echoing the language he used at the central bankers’ symposium in Jackson Hole last month – when he delivered his most combative message since being appointed to the top job at the Fed – Powell said: “We will continue until we hear from the Task confident are done.”
The FOMC, which said the rate hike had unanimous support from policymakers, said it “expects continued increases in the target range to be appropriate.”
Powell’s somber remarks sparked a sell-off in financial markets, with stocks giving up earlier gains. The benchmark S&P 500 ended its second straight day of losses down 1.7 percent, while the tech-heavy Nasdaq Composite was down 1.8 percent.
In volatile trading, the two-year Treasury yield, which moves with interest rate expectations, hovered near a 15-year high of 4.1 percent, set immediately after the Fed’s statement was released.
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Bryan Whalen, co-chief investment officer at TCW, said the Fed has “reiterated” and “completely eliminated” its “fake message.”[ed] no hope for a more peaceful message”.
“What stands out are the points for 2023 and the difference between the points and the market,” he said. “The Fed will come in at 4.6 percent by 2023 while the market is cut 0.5 percentage point by the end of the year.”
Fed officials also released more pessimistic economic forecasts, showing higher unemployment and slower growth, though no recession.
They expect the unemployment rate to rise from the current 3.7 percent to 4.4 percent in 2023, where it is expected to stay until the end of 2024. By 2025, the median estimate drops to 4.3 percent.
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Over the same period, annual gross domestic product growth will slow dramatically to 0.2 percent by the end of the year, before picking up a pace of 1.2 percent in 2023 as “core” inflation eased from the 4.5 percent forecast for the year Percent falls -end to 3.1 percent.
In July, the Fed’s preferred measure, the Personal Consumption Expenditure Index, was 4.6 percent.
Growth is likely to stabilize at just under 2 percent in 2024 and 2025, when officials finally expect core inflation to get closer to the Fed’s 2 percent target range.
In June, policymakers forecast that growth would slow to just 1.7 percent as inflation moves closer to the Fed’s 2 percent target. Most economists were already expecting the US economy to slide into recession next year.
The September meeting marked a major turning point for the Fed, which faced questions this summer about its determination to restore price stability after Powell indicated the central bank was beginning to worry about tightening too much.
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