This is breaking news. Refresh for updates.
The U.S. Federal Reserve raised interest rates by 0.75% for the third consecutive time as the central bank continues to try to tame multi-decade highs in inflation.
The rate hike brings the central bank’s benchmark interest rate, the federal funds rate, to a new range of 3.0% to 3.25% — its highest level since 2008 — from a current range between 2.25% and 2.5%.
Stocks initially turned negative following the announcement before bouncing back as Federal Reserve Chairman Jerome Powell spoke to the press.
In his comments, Powell first stressed that “my colleagues and I are strongly committed to bringing inflation back down to our 2% goal” before acknowledging a slowing of rate hikes at some point. The Fed policy statement indicated a relatively strong economy, highlighting “modest growth in spending and production.”
Three 75-basis-point rate hikes in a row is unprecedented since the Fed explicitly started targeting the federal funds rate to conduct monetary policy in the late 1980s. Before then, the Fed used a different mechanism for conducting monetary policy, so there’s no apples-to-apples comparison.
The Fed’s latest interest rate hike comes as inflation continues to surprise to the upside. A hot inflation report based on the consumer price index showed prices increased sharply in August from July. However, prices overall rose more slowly in August from a year earlier, thanks largely to lower gas prices. Overall, CPI rose 8.3% in August from the same month a year ago, down from 8.5% in July and from 9.1% in June, the highest level of inflation in 40 years.
The Fed continues to see inflation elevated this year. Officials see inflation rising 5.4% this year, and excluding volatile food and energy prices, up 4.5%. However, officials expect inflation next year to come down to 2.8% to 3.1% on a core basis. It’s not until 2024 that officials expect inflation gets back down closer to 2%, the Fed’s target. Officials projected 2.3% in 2024, followed by 2% in 2025.
The longer this period of high inflation continues, the greater the chances that expectations of higher inflation become entrenched, making it more difficult for the Fed to achieve price stability.
“I think the August inflation report served as a wake-up call to investors that core inflation is not going to come down rapidly. It’s going to be sticky for a while,” Shawn Snyder, head of investment strategy at Citi U.S. Wealth Management, told Yahoo Finance Live. “But I think the bigger question for investors right now is what is the terminal Fed funds rate? What is the rate at which they will go on pause?”
Fed officials expect to raise rates higher than before and keep them at that level for longer. Officials see the fed funds rate rising to 4.4% by the end of this year and 4.6% by the end of 2023. That’s up from 3.4% for this year and 3.8% previously.
The market is still pricing in significant odds of rate cuts in 2023 despite Powell’s remarks that history cautions against prematurely loosening policy.
Investors will be looking for clarity from Powell on a few key questions, including: How far and how quickly does the Fed intend to continue raising rates to quell inflation? How long does the Fed intend to keep rates at relatively high levels? And given that Fed Chair Powell has expressed that bringing down inflation would require some economic “pain,” how much pain is the Fed prepared to withstand — particularly if tightened financial conditions tilt the U.S. economy into a recession?
Click here for the latest economic news and economic indicators to help you in your investing decisions
Read the latest financial and business news from Yahoo Finance
Download the Yahoo Finance app for Apple or Android
Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, LinkedIn, and YouTube
,,,
