Powell Signals There’s More Pain to Come
“We have got to get inflation behind us. I wish there were a painless way to do that. There isn’t.”
Federal Reserve Chair Jerome Powell vowed officials will crush inflation after they raise interest rates by 75 basis points (bps) for a third straight time. He signaled even more aggressive hikes ahead than investors had expected.
“We have got to get inflation behind us. I wish there were a painless way to do that. There isn’t,” Powell told a press conference in Washington on Wednesday after officials lifted the target for the benchmark federal funds rate to a range of 3 percent to 3.25 percent.
“Higher interest rates, slower growth, and a softening labor market are all painful for the public that we serve. But they’re not as painful as failing to restore price stability and having to come back and do it down the road again,” he said.
The S&P 500 stock index ended near session lows—pushing its slide from a January record to more than 20 percent. The gauge struggled to find direction in the aftermath of the Fed announcement, climbing as much as 1.3 percent at one point. Yields on the two-year Treasury note topped 4 percent, piercing that mark for the first time since 2007. The dollar rallied.
Officials forecast that rates will reach 4.4 percent by the end of this year and 4.6 percent in 2023, a more hawkish shift in their so-called dot plot than anticipated. That implies a fourth-straight 75 bps hike could be on the table for the next gathering in November, about a week before the U.S. midterm elections.
The Fed chief agreed that the median of quarterly projections submitted by policymakers implied a further 125 bps of tightening this year. But he said that no decision has been taken on the size of the rate increase at the next meeting, and he stressed that a fairly large group of officials prefer to lift rates by only a percentage point by year-end.
Powell said his main message is that he and his colleagues are determined to bring inflation down to the Fed’s 2 percent goal, and they “will keep at it until the job is done.” The phrase invoked the title of former Fed chief Paul Volcker’s memoir, “Keeping at It.”
“We’ve written down what we think is a plausible path for the federal funds rate. The path that we actually execute will be enough—it will be enough to restore price stability,” he said. That was a strong signal that officials will not hesitate to raise rates by more than they currently expect if that’s what it takes to cool inflation.
Further ahead, rates are seen stepping down to 3.9 percent in 2024 and 2.9 percent in 2025, their projections showed.
“This is Powell’s last roll of the dice, and he is going all in,” said Derek Tang, an economist at LH Meyer in Washington. “The higher unemployment forecasts are fair warning they will inflict pain, and this has just begun.”
The updated forecasts show unemployment rising to 4.4 percent by the end of next year and the same at the end of 2024—up from 3.9 percent and 4.1 percent, respectively, in June projections.
The Fed’s quarterly projections, which show a steeper rate path than officials laid out in June, underscore the Fed’s resolve to cool inflation despite the risk that surging borrowing costs could tip the United States into recession. Interest rate futures show investors betting rates will peak around 4.6 percent in early 2023.
What Bloomberg Economists Say …
“More important even than the 75 bps rate hike at the September 20 to 21 FOMC meeting was the shift in the committee’s views in the updated Summary of Economic Projections. Almost two-thirds of members now see rates peaking next year even higher than the 4.5% markets had priced in. Bloomberg Economics expects the terminal rate ultimately will be 5%.”
—Anna Wong, Andrew Husby & Eliza Winger (economists)
Powell and his colleagues, slammed for a slow initial response to escalating price pressures, have pivoted aggressively to catch up and are now delivering the most aggressive policy tightening since the Fed did under Volcker four decades ago.
Estimates for economic growth in 2023 were marked down to 1.2 percent and 1.7 percent in 2024, reflecting a bigger impact from tighter monetary policy.
Inflation peaked at 9.1 percent in June, as measured by the 12-month change in the U.S. consumer price index. But it’s failed to come down as quickly in recent months as Fed officials had hoped: In August, it was still 8.3 percent.
Job growth, meanwhile, has remained robust. The unemployment rate, at 3.7 percent, is still below levels most Fed officials consider to be sustainable in the longer run. The failure of the labor market to soften has added to the impetus for a more-aggressive tightening path at the U.S. central bank.
Fed action is taking place against the backdrop of tightening by other central banks to confront price pressures, which have spiked around the globe. Collectively, about 90 nations have raised interest rates this year, and half of them have hiked by at least 75 bps in one shot.
—With assistance from Vince Golle, Liz Capo McCormick & Molly Smith.
Copyright 2022 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.