Fed raises interest rate by 75 basis points

7 mins read

The US Federal Reserve (Fed) announced its September interest rate decision. The Fed raised interest rates by 75 basis points, in line with expectations.

In a statement released by the Fed, it was stated that the decision to raise the interest rate was taken unanimously.

Emphasizing that the Federal Open Market Committee (FOMC) aims to achieve maximum employment and 2 percent inflation in the long term, it was reported that it was decided to raise the federal funds rate to 3.00-3.25 percent to support these goals.

The general expectation of the markets was for a 75 basis point increase in the third month. In the markets, the expectation that the Fed would raise the policy rate by 100 basis points for the first time since the 1980s remained at 20 percent.

In the Fed’s statement, it was noteworthy that the Fed reused the guidance that it would be appropriate to continue interest rate hikes at next month’s meetings.

In the Fed’s projections for economic data, the average interest rate expectation of bank officials for the end of 2022 was recorded as 4.4 percent, while it was stated as 4.6 percent for the end of 2023.

The Fed had started to change its monetary policy tone in the last quarter of 2021, with high inflation pressure from the rapid economic recovery following the COVID-19 pandemic. The bank completed its asset purchase operation in March and started raising interest rates.

At its March meeting, the Fed decided to raise interest rates for the first time since 2018 with an increase of 25 basis points, while at the May meeting, it realized the fastest rate hike since 2000 with 50 basis points. The bank, which raised interest rates by 75 basis points in June, the strongest rate hike since 1994, raised the interest rate at the same rate at the July meeting.

Inflation, which continued its upward trend as the Russia-Ukraine war and the quarantine measures taken against the COVID-19 outbreak in China increased the problems in the supply chain, further intensified the pressure on the Fed.

Inflation in the US followed a course above expectations, although it declined to 8.5 percent in July and 8.3 percent in August, after reaching an annual rate of 9.1 percent in June, the highest level since November 1981.

Recent indicators pointed to moderate growth
Following the two-day Federal Open Market Committee (FOMC) meeting, the Fed said in a statement that recent indicators point to moderate growth in overall economic activity.

Employment gains have been strong in recent months and the unemployment rate remains low, the statement said.

Noting that inflation remains elevated, the statement said that Russia’s attack on Ukraine has caused enormous humanitarian and economic challenges. It was pointed out that the war and related events put additional upward pressure on inflation and put pressure on global economic activity.

The Fed’s statement reemphasized that the committee is very “cautious” about inflation risks.

In addition to the 75 basis point rate hike, the statement said that the Committee will continue to reduce its holdings of Treasury bonds and mortgage-backed securities in line with the balance sheet reduction plan announced in May.

In the statement, it was stated that the Committee is very determined to reduce inflation to the 2 percent target, and it was reiterated that the effects of incoming information on the economic outlook will continue to be monitored. It was stated that the Committee will be ready to adjust the monetary policy stance appropriately if risks that may prevent the Committee from achieving its targets emerge.

Inflation forecast raised, growth expectations fall sharply
The Fed also announced its forecasts for the economy, raising its inflation forecast for this year and lowering its growth expectations.

According to the Fed’s forecasts;

– The inflation (PCE inflation) forecast for this year was raised from 5.2 percent to 5.4 percent.

– Inflation forecasts were increased from 2.6 percent to 3.1 percent for 2023 and from 2.3 percent to 2.2 percent for 2024.

– The expectation for PCE inflation, the inflation indicator followed by the Fed, was raised from 5.2 percent to 5.4 percent for 2022, from 2.6 percent to 2.8 percent for 2023 and from 2.2 percent to 2.3 percent for 2024.

– Forecasts for core inflation, which excludes volatile energy and food prices, were raised from 4.3 percent to 4.5 percent for this year and from 2.7 percent to 3.1 percent for 2023, while they were left unchanged at 2.3 percent for 2024.

– The growth forecast for the US economy for this year was reduced from 1.7 percent to 0.2 percent.

– The growth forecast for the country’s economy for 2023 was reduced from 1.7 percent to 1.2 percent and for 2024 from 1.9 percent to 1.7 percent.

– The long-term growth forecast for the US economy was maintained at 1.8 percent.

– Forecasts for the unemployment rate were raised from 3.7 percent to 3.8 percent for this year, from 3.9 percent to 4.4 percent for 2023 and from 4.1 percent to 4.4 percent for 2024.

– The median expectation for the funding rate was raised from 3.4 percent to 4.4 percent for 2022, from 3.8 percent to 4.6 percent for 2023 and from 3.4 percent to 3.9 percent for 2024.

– The long-term average interest rate forecast was left unchanged at 2.5 percent.

The US economy, which recovered from the COVID-19 crisis, showed the strongest growth since 1984 with 5.7 percent last year.

On the other hand, as central banks around the world take action to fight inflation, the Bank of England is expected to raise interest rates again on Thursday.

Monetary policymakers face the dilemma that too weak a response could keep inflation high, while too tough a stance against inflation could trigger a recession.

FİKRİKADİM

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