Federal Reserve raises key rate by 0.75 pc

Financial markets are pricing in the Fed’s year-end fund rate at about 4.31 percent, up from about 4.22 percent before the last policy meeting.

Mr Powell said his main message was that officials were “determined” to bring inflation back to the Fed’s 2 percent target, adding that “we will stick with it until the job is done.” The sentence invoked the title of former Fed chief Paul Volcker’s memoir Stay with it.

The Fed raised the median unemployment forecast for the end of this year to 3.8 percent. It believes the unemployment rate will reach 4.4 percent in 2023, where it will remain through 2024 before falling to 4.3 percent in 2025.

These revised forecasts are higher than in June, with unemployment at 3.7 percent this year, 3.9 percent next year and 4.1 percent in 2024.

Thierry Wizman, strategist at Macquarie, said the more pessimistic labor market outlook showed the Fed was trying to manage expectations of future economic pain. However, some economists still expect a full-blown recession.

“The new forecasts show that the Fed is willing to adjust people’s expectations about a slowdown in the economy. I think such projections are more symbolic than realistic,” said Mr Wizman.

The Fed cut its growth forecast to 0.2 percent this year, from a forecast of 1.7 percent in June. The central bank expects a weak recovery to 1.2 percent next year, again lower than its forecast of 1.7 percent for June. For 2024, it forecasts growth of 1.7 percent, down from a previous estimate of 1.9 percent.

“Powell’s admission that there will be below-trend growth for a period of time should be translated as a central bank ‘recession’,” said Seema Shah of Principal Global Investors. “Times will get tougher from here.”

The lower forecasts reflect a greater impact from the tighter monetary policy.

All three major US stock benchmarks ended in the red after a volatile trading session; the Dow fell 522 points. The Dow and S&P500 fell 1.7 percent each, while the Nasdaq lost 1.8 percent.

After the Fed rate hikes earlier this year, Wall Street reacted positively. In March, the S&P500 rose 2.24 percent on the day. In May, it gained 2.99 percent. In June, the benchmark rose 1.46 percent and in July the index gained 2.62 percent.

With such historic results, Mr. Wizman of Macquarie said it was likely that bargain hunters took advantage of the early sell-off in the markets.

The Fed also acknowledged that inflation had become more tacky and slightly raised its projections. This year, it expects core inflation – excluding food and energy – to reach 4.5 percent, up from 4.3 percent forecast in June.

Core inflation is expected to hit 3.1 percent next year, up again from the Fed’s June forecast of 2.7 percent.

Inflation peaked at 9.1 percent in June, as measured by the annual change in the US consumer price index. But it hasn’t fallen as quickly as Fed officials had hoped. In August it was still 8.3 percent.

The Fed’s action comes against the backdrop of tightening by other central banks to deal with price pressures that have increased globally. Collectively, about 90 have hiked interest rates this year, and half of them have risen by at least 75 basis points at one time.

WITH BLOOMBERG

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