Federal Reserve System Interest rate hike It’s the biggest move since 1994, at three-quarter percent points on Wednesday, as the central bank stepped up its efforts to tackle the fastest inflation in 40 years.
The significant rate hikes expected by the market emphasize that Fed officials are serious about crushing price hikes, even if they cost the economy.
As a sign of how the Federal Reserve expects its policies to impact the economy, Authorities predict The unemployment rate will rise to 3.7% this year and 4.1% by 2024, and growth will slow significantly as policymakers raise borrowing costs significantly and curb economic demand.
The Fed’s policy rate is currently set in the range of 1.50 to 1.75, and policy makers have suggested raising interest rates further in the future. The Federal Reserve has set an interest rate of up to 3.4% by the end of 2022 in a new set of economic forecasts. This is the highest level since 2008 and authorities expect it to peak at 3.8% at the end of 2023. It is significantly higher than the previous estimate that it will be the highest at 2.8% next year.
The Federal Reserve has also reiterated its prospects for a rate cut in 2024. This may indicate that the economy is very weak and believes it needs to change the direction of its policy approach. The main point from the Fed’s economic forecasts, released for the first time since March, was that authorities were becoming more pessimistic about the possibility of mildly discouraging the economy.
Emphasizing that, policymakers cut out a statement from a post-meeting statement that predicted that the labor market would remain strong and inflation could ease.
“Inflation continues to rise, reflecting supply-demand imbalances associated with pandemics, rising energy prices and rising price pressures,” the Fed reiterated in a post-meeting statement.
An official at Esther George, president of the Federal Reserve Bank of Kansas City, voted against the rate hike. George has historically been worried about high inflation and has favored higher interest rates, but in this case she would have preferred a half-point move.
Until the end of last week, markets and economists were widely expecting a half-point move. The Federal Reserve has indicated that it expects to rise a quarter point in March and 0.5 points in May and continue to rise at that pace in June and July.
But lately, central banks have been receiving a bunch of bad news about inflation. The consumer price index rose 8.6% year-on-year in May, rising at the fastest pace since late 1981 as monthly inflation remained active after removing food and fuel prices.
The Fed’s recommended inflation gauge is slightly lower, but it’s also too hot and uncomfortable. And consumers are beginning to expect faster inflation months and even years ahead, based on survey data. This is a worrying development. Economists believe that expectations are self-fulfilling and that people will demand higher wages and accept price spikes in a way that perpetuates high inflation.
It is less and less likely that the Fed will be able to average inflation to cool rapidly and gently to its long-term target of 2% per annum.
Central banks are trying to put the economy on a more sustainable path without a serious recession that sacrifices employment and tank growth. Policy makers want to raise borrowing costs to keep demand low enough to balance supply and demand without causing great pain. However, as price increases turn out to be stubborn, so-called soft landings become more difficult to achieve.
Rising central bank interest rates are already filtering the wider economy, Boost mortgage rates Help the housing market start to cool.Demand for other consumer goods Showing signs As borrowing money becomes more expensive, it begins to slow down, and companies may cut back on expansion plans.
The goal is to keep up with demand, as supply remains constrained due to global factory shutdowns, transportation problems and labor shortages.
However, it is difficult to curb demand without curbing growth, especially as consumption is the largest part of the US economy. If the Fed has to significantly curb spending to curb inflation, it can lead to unemployment and business closures.
Markets are increasingly afraid that central bank policies will cause a recession. Stock prices have plummeted and bond market signals are flashing red, as Wall Street traders and economists are increasingly expecting a downturn next year.