The Federal Reserve is set to raise its benchmark policy rate by 0.75 percentage points for the third time in a row on Wednesday as it looks to hit the brakes on the overheating US economy.
The Federal Open Market Committee is expected to lift the federal funds rate to a new target range of 3 per cent to 3.25 per cent following its two-day policy meeting, advancing its most aggressive monetary tightening campaign since the early 1980s.
Some economists have speculated the Fed will opt for a full percentage point rate rise, but the odds overwhelmingly favour a move of 0.75 percentage points.
The European Central Bank (ECB) raised rates by 0.75 points earlier this month, following a half-point increase in July. ECB president Christine Lagarde on Tuesday said euro zone borrowing costs will rise more in the months ahead.
Alongside the US rate decision, which is due at 2pm Eastern time, the US central bank will also publish a compilation of Fed officials’ interest rate projections — the so-called “dot plot” — for the period through to the end of 2025.
This is expected to show officials committing to a “higher for longer” policy approach, involving additional large rate rises this year that will bring the fed funds rate to roughly 4 per cent, as they look to back up their recent hawkishness on fighting inflation.
Economists expect further rate rises to be projected into 2023, pushing the peak of the fed funds rate closer to 4.5 per cent. Officials are unlikely to project cutting the policy rate before 2024, Fed watchers say.
In June, the last time the projections were updated, officials predicted the fed funds rate would reach just 3.4 per cent by the end of the year and 3.8 per cent in 2023, before declining in 2024. At that time, the median estimate for the unemployment rate was 3.9 per cent in 2023 and 4.1 per cent in 2024.
On Wednesday, that unemployment figure is expected to rise higher and faster, as officials more directly acknowledge the impact of their efforts to tackle inflation. The median estimate for the unemployment rate is now likely to top 4 per cent in 2023.
Fed chair Jay Powell has also indicated the US central bank needs to see a “sustained period of below-trend growth” if it is to be successful in containing price pressures, suggesting officials’ gross domestic product forecasts will also be revised lower.
In June, policymakers projected inflation would moderate closer to the Fed’s target of 2 per cent, with growth falling only to 1.7 per cent. Most economists now expect the US economy to tip into a recession next year, although they do not expect officials to yet forecast that.
The September meeting marks an important juncture for the central bank, which faced questions this summer over its resolve to restore price stability after Powell suggested the Fed was discussing easing up on its aggressive monetary tightening and beginning to worry about overtightening.
At the annual symposium of central bankers in Jackson Hole, Wyoming, last month, the chair sought to counter that narrative by declaring that the Fed “must keep at it until the job is done”.
Financial markets have repriced to the Fed’s new path forward, and US government bond yields have surged as rate expectations have risen.
The two-year Treasury, which is most sensitive to changes in the policy outlook, is trading around 4 per cent, having hovered at roughly 3 per cent at the start of August. The yield on the benchmark 10-year note also recently rose above 3.5 per cent for the first time since 2011.
US stocks, meanwhile, recorded their biggest weekly loss in months last week. — Copyright The Financial Times Limited 2022