The Federal Reserve looks for another historic rate hike on Wednesday

The Federal Reserve looks for another historic rate hike on Wednesday

All eyes are on the Federal Reserve as the central bank begins a two-day policy meeting on Tuesday, as officials are widely expected to raise short-term interest rates by three-quarters of a percentage point at the end of their meeting on Wednesday.

In light of stubborn inflation, officials are expected to raise the central bank’s benchmark interest rate — the federal funds rate — to a new range of 3.0% to 3.25% from the current range of 2.25 to 2.50%. This would mark a third straight 75-point hike since June, taking rates to their highest level since 2008.

The Fed is likely to signal that it will raise interest rates more aggressively and expect higher rates to last longer when it releases a summary of all officials’ interest rate expectations known as the “dot plot.”

“With inflation rampant, Powell will try hard not to change the hawkish outlook and underscore the FOMC’s determination to act to reduce inflation to more acceptable levels,” wrote Roberto Perli, global head of policy for Piper Sandler macro research. . in a note to clients. “He will also likely continue to talk about the ‘pain’ required to achieve that objective, which is a polite way of saying that the Fed is willing to suffer a recession to achieve its inflation objective.”

Markets expect the benchmark interest rate to rise above 4% by the end of the year, according to CME Group. However, how high and how fast interest rates go from there and how long they stay at high levels are open questions.

“They’ve acknowledged for a while that this is going to be a bumpy ride as they continue to reduce inflation,” Vanguard Group Senior International Economist Andrew Patterson tell Yahoo Finance Live. “But [Wednesday] we would expect them to really emphasize not necessarily the terminal rate – they’re not going to give you much clarity on that, maybe they’ll hint at it – but really how long they’re going to keep rates at that last rate.”

The Chairman of the Federal Reserve, Jerome Powell, has emphasized keeping rates high to fight inflation, noting that the Fed does not want to risk Americans’ expectations of keeping inflation rising and that the History warns against premature release of policy. Meanwhile, FED Vice Chairman Lael Brainard has said that monetary policy will need to be restrictive for a while and that the Fed is there as long as it takes to reduce inflation.

Federal Reserve Chairman Jerome Powell attends a press conference in Washington, DC, July 27, 2022. (Photo by Liu Jie/Xinhua via Getty Images)

Federal Reserve Chairman Jerome Powell attends a press conference in Washington, DC, July 27, 2022. (Photo by Liu Jie/Xinhua via Getty Images)

Perli expects the Fed’s interest rate projections to be “significantly” higher than in June – when officials projected the fed funds rate would end up between 3.4% and 3.8% in 2023 – and the Fed is also projected to bring the funds rate up to between. 4% and 4.25% by the end of the year.

The Fed will also release a summary of its quarterly economic projections, which will include Fed officials’ views on inflation, unemployment, and the overall economy. Given expectations for higher interest rates, many economists expect officials to lower their forecasts for GDP growth this year, and raise their unemployment and inflation estimates.

“We see the risk of a recession, especially if the Fed continues to become more aggressive,” Luke Tilley, Wilmington Trust’s chief economist, wrote in a note to clients. “They could overdo it and rightly so. And that poses a risk to the outlook and could send us into recession.”

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