On September 21, local time, the Federal Reserve announced that it would continue to raise interest rates by 0.75 percentage points, raising the federal benchmark interest rate to between 3% and 3.25%, the highest level since the beginning of 2008. The decision was unanimously agreed by the 12 members of the Fed’s interest rate setting committee. support, and hinted that further sharp rate hikes are likely at future meetings to combat inflation near 40-year highs in the country.
Jeffrey Gundlach, the “new debt king”, founder and CEO of DoubleLine Capital, commented that the Fed is pushing the economy into recession. Powell also admitted in a press conference that a recession is possible and the chances of a “soft landing” are likely to diminish.
In the early 1980s, the Federal Reserve under Paul Volcker managed to “tame” high double-digit inflation in the United States by continuously raising interest rates, but at the cost of a recession. Last year, Powell also said that inflation was temporary, and he had to rush to copy Volcker’s homework. The recession script may be staged again.
Cut rates or wait until 2024
The Fed is expected to raise its benchmark federal interest rate to 4.4 percent by the end of the year, according to a spot-on chart and economic forecasts on Wednesday, implying at least 75 percentage point hikes at the remaining two meetings this year.
The dot plot shows that 6 out of 9 officials support raising rates to a range of 4.75%-5% next year, but the central trend is 4.6%, which would put rates in the 4.5%-4.75% range. The chart shows that rate cuts may wait until 2024, with officials forecasting as many as three cuts in 2024 and four in 2025 to lower the long-term benchmark rate to a median outlook of 2.9%.
The federal benchmark rate, the overnight rate for interbank lending, affects other consumer and business borrowing costs across the economy, including rates on mortgages, credit cards, savings accounts, auto loans and corporate debt. Higher interest rates typically discourage spending, while lower rates encourage such borrowing.
Markets have been bracing for a more aggressive Fed.
“The Fed isn’t close to a pause or a turnaround,” said Bill Zox, portfolio manager at Brandywine Global, of the magnitude of rate hikes. “They’re focused on fighting inflation, and a key question is what else could they disrupt.”
Traders have fully priced in a 0.75 percentage point hike, according to CME Group data. Futures contracts ahead of Wednesday’s meeting imply a benchmark rate of 4.545 percent through April 2023.
The Fed has been reducing the bond holdings it has built up over the years as it raises rates. The rate of reduction doubled further from September to $95 billion per month, which also marked the beginning of the Fed’s full-speed “quantitative tightening”.
Recession for inflation
Inflation and recession are like two ends of a balance beam, and in theory, a big rate hike would slow the economy. And Fed officials are raising interest rates at the fastest pace since the 1980s and have approved rate hikes at five consecutive policy meetings.
The U.S. unemployment rate is expected to rise to 4.4% in 2023 from the current 3.7%, according to a summary of economic forecasts on Wednesday. Meanwhile, GDP growth is expected to slip to just 0.2% in 2022, before rising slightly to 1.8% long-term growth in subsequent years. The revised forecast was down sharply from June’s 1.7% forecast and came after two consecutive quarters of negative growth, widely considered the definition of a recession.
Powell acknowledged that a recession is possible, especially if the Fed has to continue to aggressively tighten policy.
“No one knows if this process will lead to a recession, or if so, how severe it will be… It will depend on how quickly wage and price inflation pressures fall, whether expectations remain stable and what we do,” he said in the release. whether to get more labor supply”.
The “new debt king” Gundlach said in a CNBC interview that the inversion of the yield curve has shown that “the economy is flashing a red light.”
The yield curve inverts when short-term Treasury yields are higher than long-term Treasury yields. Many economists believe that the 2-year and 10-year portions of the yield curve are more predictive of a potential recession.
The US 2-year/10-year Treasury yield spread curve first inverted on March 31, then returned to positive territory before briefly inverting again in June. This part of the curve has been inverted since early July.
The policy-sensitive 2-year Treasury yield rose 15 basis points to 4.113% after the Fed announced a rate hike, the highest since October 2007, while the benchmark 10-year Treasury yield hit a high of 3.64% in 2011 The highest level since February.
Gundlach explained: “I do think unemployment is going to go up, we’re heading for a recession, and the Fed should address that differently, but now they’re so committed to this 2% [inflation target], I think a recession in 2023 The probability is very high, the probability is as high as 75%.”
“The aggressive signal from the Fed really surprised us,” Mark Cabana, head of short-term rates at Bank of America, said in a Wall Street Journal interview. “This is very consistent with the Fed’s recent shift in commentary, which sounds like the Fed can definitely risk a recession by tightening it. monetary policy to reduce inflation”.
Not just the Fed, but central banks in other wealthy economies, including the U.K., Europe and Canada, have also been raising interest rates by the most on record, according to economists at Credit Suisse, the largest increase in global monetary policy since 1989. The fastest time ever.
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