US Fed delivers big rate hikes, signals next one could be smaller | Business and Economy News

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It took note of the still-evolving impact that its rapid pace of rate hikes has set in motion, saying the target range of future hikes will be ‘appropriate’.

The US Federal Reserve has raised interest rates by 0.75 percentage points as it continues to battle the worst outbreak of inflation in 40 years, but is signalling that future increases in borrowing costs could be made in smaller steps to account for the “cumulative tightening of monetary policy” it has enacted so far.

The new language in the policy statement on Wednesday took note of the still-evolving impact that the Fed’s rapid pace of rate hikes has set in motion, and a desire to hone in on a level for the federal funds rate “sufficiently restrictive to return inflation to 2 percent over time”.

“Ongoing increases in the target range will be appropriate,” the Fed, the United States central bank, said at the end of its latest two-day policy meeting. While not foreclosing any future decision, officials said, “In determining the pace of future increases in the target range, the [Federal Open Market] Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

Monetary policy refers to a set of tools used by a nation’s central bank to control the overall money supply in a country, including by using strategies such as setting interest rates.

The language acknowledges the broad debate that has emerged around the Fed’s policy tightening, its impact on the US and world economies, and the danger that continued large rate hikes could stress the financial system or trigger a recession.

While its recent rapid increases have been done in the name of moving “expeditiously” to catch up with inflation running at more than three times the Fed’s 2 percent target, the central bank is now entering a more nuanced phase – fine-tuning instead of “front-loading.”

The policy decision set the target federal funds rate in a range between 3.75 percent and 4 percent, 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 rate increases since former Fed Chair Paul Volcker’s fight to control inflation in the 1970s and 1980s.

Done with ‘front-loading’

The Fed’s statement said officials remained “highly attentive to inflation risks,” opening the door to further hikes.

The economy, the Fed noted, appeared to be growing modestly, with still “robust” job gains and low unemployment.

Speaking at a news conference following the Federal Open Market Committee (FOMC) meeting, Fed Chair Jerome Powell said that the next rate hike may be smaller in size.

“That time is coming and it may come as soon as the December meeting,” Powell said, while adding “no decision has been made” yet on what action to take.

The signal that the Fed appears done with that “front-loading” phase of its tightening ignited a broad rally in US stock and bond markets, but Powell’s remarks on rates likely going higher than previously estimated triggered a reversal.

At September’s meeting, the median estimate among policymakers pegged the peak fed funds rate at between 4.5 percent and 4.75 percent next year. Rate futures markets now imply about 50/50 odds of rates climbing to 5 percent or higher next year.

The S&P 500 index was about 1 percent lower, and the Nasdaq Composite slid by more than 1.5 percent.

Yields on US Treasury securities, which had dropped sharply after the Fed statement was released, turned higher.

The shift in the FOMC statement “took me a little by surprise,” said Derek Tang, an economist with forecasting firm LH Meyer. The Fed’s statement “was a lot more definite about a possible downshift than I thought it would be. I thought [Fed Chair Jerome Powell] would reserve a lot more judgement 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 go.”

Sumber: www.aljazeera.com

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