The Federal Reserve raised interest rates by 0.75 percentage points for the third consecutive meeting

We have to keep inflation behind us. I wish there was a painless way to do this. Federal Reserve Chairman Jerome Powell said at a news conference after the interest rate decision.

Stock markets plummeted After a volatile trading day. The broad S&P 500 fell 66 points, or 1.7%, to 3,789.93. The yield on the two-year US Treasury is stable around 3.993%, according to Tradeweb, from 3.962% on Tuesday, its highest level in nearly 15 years. Immediately after the Fed’s announcement, it touched a high of 4.12%. while, Returns on Long-Term Treasurys It fell, because higher rates could lead to a more severe economic downturn.

Officials expected rates to continue to rise through 2023, and most expect the Fed funds rate to stabilize at around 4.6% by the end of next year. That was up from 3.8% they had forecast last June.

Analysts said they did not expect the Fed to show a very high price end point. said Eileen Mead, an economist at Duke University, who was a former senior advisor at the Federal Reserve.

Forecasts showed significant divergence on what might happen after next year. About a third of officials expect to keep the federal funds rate above 4% through 2024, while others expect further rate cuts.

Plerina Orochi, US economist at T.

Although the economy has yet to show the full effects of the Fed rate hike, “All this volatility and uncertainty is making it difficult for companies to make plans. There are some benefits to repeating this rate hike and getting rid of it sooner.”

A year ago, the Fed was signaling that rates might stay near zero for another year, and it was buying Treasuries and mortgages to provide additional stimulus. Officials miscalculated the strength of the economy’s recovery from the pandemic and how high inflation would rise.

They are now raising rates at the fastest pace since the 1980s and have approved the increases in five consecutive policy meetings, beginning in March when they raised the federal funds rate from near zero. Until June, the Fed had not raised interest rates by 0.75 points since 1994.

Officials made a second such increase in July, but cited more concerns about interest rate hikes, which, along with investor optimism about how quickly inflation might fall, sent the market higher.

The rally threatened to undermine the Fed’s steps to slow the economy and weaken price pressures, and Mr. Powell delivered a blunt speech last month. In Jackson Hole, U.S.A. (ed.).designed to underscore the Federal Reserve’s commitment to reducing inflation.

To limit further confusion on Wednesday, Powell prefaced his answers to reporters’ questions with a disclaimer. “My main message hasn’t changed at all since Jackson Hole,” he said.

During his press conference, Vincent Reinhart, chief economist at Dreyfus & Mellon, said.

The more the Fed raises interest rates, the greater the risk of exceeding them, and pushing the economy into a recession. But Powell has repeatedly stressed the need to lower inflation now to avoid a worse recession later.

“No one knows if this process will lead to a recession, or if so, how important that recession will be,” he said. We certainly haven’t given up on the idea that we can get a relatively modest increase in unemployment. However, we need to complete this task.”

The economy slowed in May and June but appeared to regain momentum over the summer. Powell said Wednesday that the Fed wants to see more evidence that the labor market is cooling. The economy has added an average of 380,000 jobs per month over the past six months, well above the rate of about 50,000 jobs economists believe will keep the unemployment rate steady.

Meanwhile, this summer’s inflation readings didn’t get any worse but neither did they show the kind of improvement the Fed and many economists wanted to see. Gasoline prices fall Caused overall inflation to ease in July and August, but Climbing housing costs And prices for services such as dental visits, hospital visits, haircuts and car repairs kept inflation high.

The CPI rose 8.3% in August from a year earlier, down from June’s 9.1% increase, its highest in four decades. Mr. Powell indicated how to do it Inflation using a separate measure Consistently operating at 4.5% or higher, despite diminishing supply chain problems.

“This was not where we expected or wanted to be,” he said. Our expectation was that we would start to see inflation come down considerably due to the recovery on the supply side. So far we thought we’d see some of that. We do not have. “

Federal Reserve officials expected the unemployment rate to rise to 4.4% next year, From 3.7% in August and 3.5% in July. Historically, the increase in this amount in that period coincided with a recession.

Several analysts, including Ms. Meade and Ms. Uruci, said they found it unreasonable for Fed officials to expect that they could bring inflation down to 3% next year and 2% by 2025 without further damage to the labor market.

Meanwhile, Mr. Powell has been more vocal about the risks. “He’s using words that are open to stagnation,” said Ms. Mead.

United State The mortgage market has come under heavy criticism The Mortgage Bankers Association said Wednesday that tougher money is likely, and the average 30-year fixed-rate mortgage jumped to 6.25% last week from 6.01% the week before. This was the highest level since October 2008. Applications for loans to buy homes were down 30% from the same week last year.

Powell said it is likely to significantly weaken the housing market, which has rebounded during the pandemic, sending prices to new record highs. Mr. Reinhart said the acceptance was noticeable because the economy has always gone into recession when the housing sector contracts.

They want to convey that this policy will be assertive and that the economy will suffer as a result. “It’s hard for them to say how much they are suffering,” said Mr. Reinhart.

write to Nick Timiraos at [email protected]