News Tech: In an effort to combat excessive inflation, the Federal Reserve ploughed forward with a third consecutive large interest rate increase on Wednesday. However, experts warn that the strategy is gradually increasing the chance of a recession by next year.
According to the Fed’s median projection, the key rate will end 2022 in the range of 4.25% to 4.5%, a full percentage point higher than the 3.25% to 3.5% they predicted in June, and close out 2019 in the range of 4.5% to 4.75%. That means the central bank might decide to raise rates by another three-quarter points in November and then by a half-point in December.
To combat inflation by slowing the economy, the Fed increased its benchmark short-term rate by three-quarters of a percentage point to a range of 3% to 3.25%. Additionally, it substantially increased its prediction of what that rate will be at the conclusion of both this year and 2023.
However, Fed members anticipate growth to significantly slow down over the course of the next year or two as higher rates restrict economic activity. In 2024, the central bank anticipates lowering the fed funds rate by roughly three-quarters of a percent, likely in reaction to a sluggish or potential recession.
Does that portend a downturn?
Nobody can predict if or to what extent that process will cause a recession, according to Powell. I am unsure of the odds. From only a few months ago, when he expressed confidence that the Fed could raise rates to combat inflation without causing a slump, his comments reflect a striking shift in tone.
We haven’t given up on the notion that we can have a very slight increase in unemployment, he added. Already, the economy is slowing down. “Recent data suggest to modest expansion in spending and production,” the Fed said in a statement following the two-day meeting, but “job gains have been robust… and the unemployment rate has been low.”
The federal funds rate will “be appropriate,” it was stated, and it “anticipates that ongoing hikes” will take place. Stocks respond to the 2-year Treasury yield.
With the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite all falling by roughly 1.7%, stocks closed the day lower. Following the Fed pronouncement, the stock market was highly volatile, with repeated swings between gains and losses throughout the last trading hours.
After a report last week showed that inflation, as measured by the consumer price index (CPI), climbed 8.3% annually in August, below June’s 40-year high of 9.1% but above the 8% predicted, Barclays claims that Fed policymakers were forced to raise rates abruptly once more. The likelihood that Fed policymakers would raise rates by a full percentage point on Wednesday was estimated by markets that try to forecast where rates are headed to be 18%.
What was today’s Fed rate increase?
The 0.75 percentage point rate increase on Wednesday is anticipated to have a ripple effect on the economy, raising interest rates on credit cards, home equity lines of credit, and other loans. Fixed 30-year mortgage rates are already above 6%, up from 3.22% at the beginning of the year. At the same time, after years of meagre returns, families, particularly seniors, are finally reaping greater bank savings rewards. The 2-year Treasury note yield was above 4%, the highest level since 2007, indicating that investors think the battle to keep inflation in check will continue.