US Fed offers big rate hikes, signals next one could be smaller

He noted the still-evolving impact his rapid pace of rate hikes has set in motion, saying the target range for future hikes will be “appropriate.”

The US Federal Reserve has raised interest rates by 0.75 percentage points as it continues to battle the worst inflation spike in 40 years, but signals that future increases in borrowing costs could be made in smaller steps to take into account the “cumulative tightening of monetary policy”. policy” that it has enacted so far.

The new language in Wednesday’s policy statement took note of the still-evolving impact that the rapid pace of Fed rate hikes has set in motion, and a desire to focus on a level for the federal funds rate “tightly enough to bring inflation down”. to 2% over time.

“Continued increases in the target range will be appropriate,” the Fed, the U.S. central bank, said after its latest two-day policy meeting. Without ruling out any future decisions, the officials said: “To determine the pace of future increases in the target range, the [Federal Open Market] The committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.

Monetary policy refers to a set of tools used by a country’s central bank to control the overall money supply in a country, including using strategies such as setting interest rates.

The language acknowledges the broad debate that has emerged around Fed policy tightening, its impact on the U.S. and global economies, and the danger that continued steep rate hikes could stress the financial system or trigger a recession.

While its recent rapid increases were made in the name of a “quick” move to catch inflation at more than three times the Fed’s 2% target, the central bank is now entering a more nuanced phase – refine instead of “front-loading.”

The policy decision set the target federal funds rate in a range between 3.75% and 4%, the highest since the start of 2008. The US central bank has raised rates at its last six meetings from March, marking the fastest round of rate hikes since former Fed Chairman Paul Volcker’s struggle to control inflation in the 1970s and 1980s.

Finished with the “front loading”

The Fed statement said officials remained “highly attentive to inflation risks,” opening the door for further hikes.

The economy, the Fed noted, appears to be growing modestly, with still “robust” job gains and low unemployment.

Speaking at a news conference following the Federal Open Market Committee (FOMC) meeting, Fed Chairman Jerome Powell said the next rate hike could be smaller.

“That time is approaching and it could come as early as the December meeting,” Powell said, while adding “no decision has been made yet” on what action to take.

The signal that the Fed appeared to be done with this “frontloading” phase of its tightening sparked a broad rally in US stock and bond markets, but Powell’s remarks about likely higher-than-expected rates sparked a reversal.

At the September meeting, the median estimate among policymakers pegged the maximum federal funds rate at between 4.5% and 4.75% next year. Rate futures markets now imply about a 50/50 chance that rates will climb to 5% or more next year.

The S&P 500 index was about 1% lower and the Nasdaq Composite slipped more than 1.5%.

Yields on US Treasury securities, which had fallen sharply after the release of the Fed statement, rose.

The change in the FOMC statement “took me a bit by surprise,” said Derek Tang, an economist at forecasting firm LH Meyer. The Fed statement “was much more specific about a possible downgrade than I thought. I thought [Fed Chair Jerome Powell] would reserve a lot more judgment through December, but it appears the committee has reached consensus that it could downgrade as early as December, depending on how the data evolves.