Powell said in his post-meeting news conference that his main message has not changed since Jackson Hole. The committee is determined to bring inflation down to 2% and will keep doing so until the job is done.
The increases that started in March are the most aggressive since the Fed began using the overnight funds rate as its main policy tool. In 1994, when the Fed hiked a total of 2.25 percentage points, it would cut rates by July of the following year. Fed officials indicated that they would continue to hike until the funds level reached a "terminal rate" of 4.6%. That means a quarter point rate hike next year. Thedot plot of individual members' expectations doesn't show when the rate will be cut. Powell and his colleagues have made it clear that it is unlikely that rate cuts will happen next year. The rate hikes are expected to have consequences, according to members of the Federal Open Market Committee. The funds rate on its face addresses the rates that banks charge each other for overnight lending, but it bleeds through to many consumer debt instruments such as home equity loans and credit cards. In their quarterly updates of estimates for rates and economic data, officials coalesced around the expectation that the unemployment rate would rise to 4.4% by next year. recessions accompany increases of that magnitude. Along with that, they expect GDP to grow at a slower rate in the next few years, rising to a long-term rate of 1.8% in the following years. A commonly accepted definition of a recession is that of two consecutive quarters of negative growth.
Powell said that a recession is possible if the Fed keeps raising interest rates.
He said no one knows if this process will lead to a recession or if it will be significant. The Fed's preferred personal consumption expenditures price index, which is used to measure inflation, showed inflation at 6.3% in July. Inflation is projected to fall back to the Fed's 2% goal by the year 2025. Excluding food and energy, core inflation is expected to decline to 4.5% this year, little changed from the current 4.6% level, before falling to 2% by the year 2025. The PCE reading has been very low. Spending and production were described as having "softened" in the July statement, but the reduction in economic growth came despite that. The meeting noted that recent indicators point to modest growth in spending and production. There were only a few changes in the statement. Job gains were described as "robust" and inflation remained elevated. Increasing the target rate will be appropriate.
The dot plot showed that almost all of the members were on board with the higher rates. Six of the 19 "dots" were in favor of taking rates to a 4% to 5% range next year, but the central tendency was to 4.6%, which would put rates in the 4% to 4% range. The Fed sets its fund rate in a range. The longer-run funds rate could be reduced to a median outlook of 2.9% by as many as three rate cuts in the next two years.
Markets were anticipating a more aggressive Fed.
Bill Zox, portfolio manager at Brandywine Global, believes that 75 is the new 25 until something breaks. The Fed is not close to a pause. They want to break inflation. What else could they break? The 0.75 percentage point move was fully priced by traders and they had assigned an 18% chance of a full percentage point move. The funds rate was implied by futures contracts just before the meeting. Powell and his colleagues spent a lot of last year dismissing high inflation astransitory. After taking rates to zero in the early days of the Covid epidemic, officials relented in March of this year and increased rates by a quarter point. The Fed has been reducing the amount of bonds it has accumulated over time. Up to 95 billion a month in proceeds from maturing bonds being allowed to roll off the Fed's balance sheet was the beginning of full-speed "quantitative tightening" in September.