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Fed Delivers Third Straight 0.75% Hike as Race to Restrictive Territory Heats Up

Thursday, September 22, 2022
Fed Delivers Third Straight 0.75% Hike as Race to Restrictive Territory Heats Up © Reuters

By Yasin Ebrahim

Investing.com -- The Federal Reserve delivered its third consecutive 0.75% rate increase on Wednesday and showed no sign of easing its push into restrictive territory as it battles to cool the embers of inflation.

The Federal Open Market Committee raised its benchmark rate to a range of 3% to 3.25% from 2.25% to 2.5% previously.

The latest Fed rate hikes lifted the benchmark rate by 300 basis points, or 3% in just six months as the central bank accelerates policy to restrictive territory with the aim of slowing growth enough to make a meaningful dent in inflation.

The Fed’s hawkish stance has many convinced that the possibility of a hard landing, or recession won’t be enough to deter the central bank from persisting with tightening.

The Fed now sees its benchmark rate rising to 4.4% in 2022, above the 3.4% forecast in June, paving the way for further front-loading of rate hikes in the remaining two Fed meetings for the year and into 2023.

The central bank previously signaled that rates would peak at about 3.8% in 2023, with cuts likely to follow in 2024, but now the central bank is preparing to keep rates higher for longer.

Rates are now expected to reach 4.6% in 2023. In 2024, the voting Fed members forecast rates dropping to 3.9%, though that is still higher than the prior forecast of 3.4%.

Last month, Powell delivered a hawkish surprise in a speech at the Jackson Hole symposium, saying that the Fed backed a “prolonged period of very restrictive monetary policy” to tackle inflation, even if it brings “some pain” for households.

Fresh projections from the Fed appear to support Powell’s stance as inflation was revised higher and growth lower.

The core personal consumption expenditures price index, the Fed’s preferred measure of inflation, is forecast to climb to 4.5% in 2022, up from a prior forecast of 4.3%. For 2023, inflation is estimated to drop to 3.1%, compared with the prior forecast of 2.7%, while in 2024 inflation expectations are unchanged at 2.3%.

"Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures," the Fed said in a statement.

Fed members estimate the economy will grow 0.2% in 2022, down sharply from a prior forecast of 1.7%. Growth forecasts were also revised lower for 2023 and 2024 to 1.2% and 1.7% from 1.7% and 1.9%, respectively.

As well as rate hikes, the Fed’ balance sheet reduction, or quantitative tightening, plan is expected to further tighten financial conditions. Earlier this month, the Fed ramped-up the pace of QT to $95 billion, up from $47.5 billion in June.

For some, the pace of the tightening has increased the risk of the Fed slowing growth by too much, pushing the economy into a deep recession.

“Clearly the risk is stacked towards exacerbating the slowdown into a hard landing. That is by far the bigger risk at the moment, and it increases with every rate raise into this slowing growth environment,” Will Rhind, founder and CEO, GraniteShares told Investing.com in an interview on Tuesday.

The threat of an imminent recession, however, remains unlikely, Rhind said, as the economy is “still in good shape, unemployment low, and consumers are still spending money.”

The Fed believes that the move to restrictive territory will weigh on consumer spending as rising unemployment keeps a lid on wages.

The central bank now sees the unemployment rate at 3.8% at year-end, up slightly from a prior forecast of 3.7%. But labor supply and demand may likely be restored in subsequent years, with unemployment expected to reach 4.4% in 2023 and remain unchanged the following year, according to the Fed's projections. That is above the prior June forecast of 3.9% and 4.1% unemployment in 2023 and 2024, respectively.

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 GBP/USD1.1416↑ Buy
 USD/JPY144.57↑ Sell
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 USD/CAD1.3586↑ Buy
 EUR/JPY142.87↑ Sell
 EUR/CHF0.9768Neutral
 Gold1,718.60Neutral
 Silver21.047Neutral
 Copper3.4758↑ Sell
 Crude Oil WTI83.98Buy
 Brent Oil89.35Neutral
 Natural Gas6.481↑ Buy
 US Coffee C215.55↑ Sell
 Euro Stoxx 503,413.95↑ Buy
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 Siemens AG103.08Buy
 Deutsche Bank AG7.758Neutral
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