Federal Reserve sees another historic rate hike on Wednesday

Federal Reserve sees another historic rate hike on Wednesday

All eyes are on the Federal Reserve as the central bank begins a two-day policy meeting on Tuesday as officials are widely expected to raise short-term interest rates by three-quarters of a percentage point by the end of their meeting Wednesday.

In the face of persistent inflation, officials are expected to raise the central bank’s benchmark interest rate – the federal funds rate — to a new 3.0% to 3.25% bandwidth from a current 2.25 to 2.50% bandwidth. This would mark the third consecutive 75 basis point rate hike since June, bringing the interest rate to its highest level since 2008.

The Fed will likely indicate that it will raise rates more aggressively and expect rates to continue rising for longer when it releases a summary of each official’s rate expectations, known as the “dot plot.”

“As inflation is rampant, Powell will do everything he can to not change the perception of an aggressive Fed and will emphasize the FOMC’s determination to bring inflation to more acceptable levels,” wrote Roberto Perli, head of the Federal Reserve. global macro research policy from Piper Sandler. in a letter to customers. “He will also likely continue to talk about ‘pain’ needed to meet that target, which is a polite way of saying the Fed is willing to tolerate a recession to meet its inflation target.”

Markets expect benchmark interest rates to rise above 4% by the end of the year, CME Group said. However, how high and how fast interest rates go from there and how long they remain at a high level remains an open question.

“They’ve recognized for a while that this will be a bumpy ride as they continue to lower inflation,” said Andrew Patterson, senior international economist for the Vanguard Group. told Yahoo Finance Live. “But [Wednesday] we would expect that they don’t necessarily emphasize the final rate – they won’t give you much clarity on that, they may hint at it – but really how long they will keep the rates at that final rate.”

Federal Reserve chairman Jerome Powell has emphasized that interest rates must be kept high to fight inflation, noting that the Fed does not want to risk American inflation expectations continuing to rise and that history warns against premature easing. of the policy. Meanwhile, Fed Vice-President Lael Brainard has said monetary policy will have to be restrictive for some time and that the Fed will spend as long as it takes to curb inflation.

Federal Reserve Chair Jerome Powell attends a press conference in Washington, DC, July 27, 2022. (Photo by Liu Jie/Xinhua via Getty Images)

Federal Reserve Chair Jerome Powell attends a press conference in Washington, DC, July 27, 2022. (Photo by Liu Jie/Xinhua via Getty Images)

Perli expects the Fed’s interest rate projections to be “significantly” higher than in June — when officials predicted the Fed fund rate would end the year at around 3.4% and 3.8% in 2023 — and also predicts that the Fed will interest will increase to between 4% and 4.25% by the end of the year.

The Fed will also release a summary of its quarterly economic forecasts, which will include the Fed’s outlook for inflation, unemployment and the general economy. Given expectations for higher interest rates, many economists expect officials to lower their GDP growth forecasts this year, while raising their estimates for unemployment and inflation.

“We see a risk of a recession, especially if the Fed continues to get aggressive,” Luke Tilley, Wilmington Trust’s chief economist, wrote in a note to clients. “They could exaggerate and overcorrect. And that poses a risk to the outlook and could plunge us into a recession.”

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