Jay Powell refused to rule out a recession in the world’s largest economy, as the Federal Reserve implemented a 0.75 percentage point increase for the third time in a row and published a bleaker set of forecasts.
Powell’s downbeat comment on the economy came when the Federal Open Market Committee raised the benchmark interest rate to a new target range from 3 percent to 3.25 percent on Wednesday and signaled an intention to keep monetary policy tight while battling high inflation.
“Nobody knows if this process will lead to a recession or if so, how important this recession is,” Powell said in response to a question about whether higher rates would hurt the economy. He added that avoiding such an outcome would depend on how quickly wage and price inflation receded and whether the overheated job market began to cool off.
Powell warned during a news conference following the rate hike, “the chances of a soft landing are likely to diminish” because monetary policy needed to be “more restrictive or restrictive for a longer period.”
His comments came after the publication of a new “point chart” of Fed officials’ interest rate expectations that cemented the central bank’s commitment to a “higher for longer” approach. It showed the record rate rising to 4.4 percent by the end of this year before peaking at 4.6 percent next year.
The point’s plot was tighter than it was in June, when it was last updated. At the time, officials expected the federal funds rate to reach just 3.4 percent by the end of the year and 3.8 percent in 2023, before declining in 2024.
Echoing the language he used at a Jackson Hole seminar for central bankers last month — when he delivered his most hawkish message since his appointment to the Fed’s top job — Powell said: “We’ll continue that until we trust the job is done.”
The Federal Open Market Committee, which said the rate hike was unanimously supported by policy makers, said it “expects that continued increases in the target range will be appropriate.”
Powell’s gloomy comments sparked a heavy selling in the financial markets with stocks giving up earlier gains. The S&P 500 closed down 1.7 percent, its second consecutive day of losses, while the heavy Nasdaq Composite fell 1.8 percent.
In choppy trading, the two-year Treasury yield, which moves in line with interest rate expectations, hovered near a 15-year high of 4.1 percent, which reached right after the Fed released its statement.
Brian Wallen, chief investment officer at TCW, said the Fed had “repeated” its “hard-line message” and “totally scrapped”.[ed] Any hope of a more pessimistic message.”
“What jumps out are the points for 2023 and the difference between the points and the market,” he said. “The Fed will reach 4.6 percent through 2023, while the market has cut 0.5 percentage points by the end of the year.”
Federal Reserve officials also published a more pessimistic set of economic forecasts that showed higher unemployment and lower growth, albeit not stagnation.
They see the unemployment rate rising from its current rate of 3.7 percent to 4.4 percent in 2023, when it is expected to remain until the end of 2024. By 2025, the average estimate is down to 4.3 percent.
During the same period, annual GDP growth is set to slow significantly to 0.2 per cent by the end of the year before hitting a pace of 1.2 per cent in 2023 as “core” inflation declines from the 4.5 per cent level projected for this year – up to 3.1 percent.
As of July, the Fed’s preferred measure, the core PCE price index, was flat at 4.6 percent.
Growth is set to stabilize near 2 percent in 2024 and 2025, when officials finally expect core inflation to approach the Fed’s 2 percent target range.
In June, policymakers predicted that as inflation neared the Fed’s 2 percent target, growth would slow to just 1.7 percent. Most economists have already predicted that the US economy will head into a recession next year.
The September meeting marks an important turning point for the Federal Reserve, which this summer faced questions about its intention to restore price stability after Powell indicated the central bank was beginning to worry about over-tapping.