US Fed makes another 0.75 point rate hike, signals smaller increases ahead but higher peak
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WASHINGTON â The US Federal Reserve on Wednesday raised interest rates by three-quarters of a percentage point as it continued to battle the worst outbreak of inflation in 40 years, but signalled future increases in borrowing costs could be made in smaller steps to account for the âcumulative tightening of monetary policyâ it has enacted so far.
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Fed chairman Jerome Powell said the change in pace could come as soon as the central bankâs next meeting in December, but he also cautioned that there remained extensive uncertainty about how high rates would need to go, and they could well end up being higher than policymakers had estimated at their last meeting in September.
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The time to reassess the pace of increases âis comingâ, Mr Powell said at his press conference following the decision by the policy-setting Federal Open Market Committee (FOMC) to increase rates by a three-quarter point margin for a fourth straight meeting.
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âIt may come as soon as the next meeting or the one after that,â Mr Powell said. âNo decision has been made. It is likely we will have a discussion about this at the next meeting.â
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The new language in the central bankâs latest policy statement took note of the still-evolving impact that its rapid pace of rate hikes had set in motion, and a desire to hone in on a level for the federal funds rate that is âsufficiently restrictive to return inflation to 2 per cent over timeâ.
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âOngoing increases in the target range will be appropriate,â the FOMC said at the end of a two-day meeting.
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The language acknowledges the broad debate that has emerged around the Fedâs policy tightening, its impact on the United States and world economies, and the danger that continued large rate hikes could stress the financial system or trigger a recession.
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While its recent rapid increases have been done in the name of moving âexpeditiouslyâ to catch up with inflation running at more than three times the Fedâs target, the central bank is now entering a more nuanced phase â fine-tuning instead of âfront-loadingâ.
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The policy decision set the target federal funds rate in a range between 3.75 per cent and 4 per cent, the highest since early 2008. The US central bank has raised rates at its last six meetings beginning in March, marking the fastest round of increases since former Fed chair Paul Volckerâs fight to control inflation in the 1970s and 1980s.
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The Fedâs statement said officials remained âhighly attentive to inflation risksâ, opening the door to further hikes.
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The economy, the Fed noted, appeared to be growing modestly, with still ârobustâ job gains and low unemployment.
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The signal that the Fed appears done with that âfront-loadingâ phase of its tightening initially ignited a broad rally in US stock and bond markets, but Mr Powellâs remarks on rates likely going higher than previously estimated triggered a reversal.
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At Septemberâs meeting, the median estimate among policymakers pegged the peak fed funds rate at between 4.5 per cent and 4.75 per cent next year. Rate futures markets now imply about 50-50 odds of rates climbing to 5 per cent or higher next year.
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The S&P 500 index was about 1 per cent lower, and the Nasdaq Composite slid by more than 1.5 per cent.
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Yields on US Treasury securities, which had dropped sharply after the Fed statement was released, turned higher. The two-year note â the bond maturity most sensitive to Fed policy expectations â rose by one basis point to 4.56 per cent.
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The shift in the FOMC statement âtook me a little by surpriseâ, said Mr Derek Tang, an economist with forecasting firm LH Meyer.
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â(The statement) was a lot more definite about a possible downshift than I thought it would be. I thought (Powell) would reserve a lot more judgment until December, but it seems like the committee did reach a consensus that they could downshift as early as December, depending on how the data goes,â he said. REUTERS
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US Fed makes another 0.75 point rate hike, signals smaller increases ahead but higher peak. (2022, November 3). The Straits Times. https://www.straitstimes.com/business/economy/us-fed-makes-another-075-point-rate-hike-signals-smaller-increases-ahead-but-higher-peak