File photo of the US Federal Reserve (Fed) headquarters in Washington DC
by Howard Schneider and Ann Saphir
WASHINGTON (Reuters) – The U.S. Federal Reserve (Fed) raised its main interest rate by three-quarters of a point on Wednesday in a bid to rein in inflation, but suggested future increases in the cost of credit could come at a a slower pace.
Fed Chairman Jerome Powell indicated at a press conference that a slowdown in rate hikes could take place as soon as the next meeting in December.
The time to reassess the pace of increases “is coming”, said Jerome Powell.
“It can happen at the next meeting or the one after that,” he continued. “No decision has been made. It is likely that we will have a discussion on this at the next meeting.”
He warned, however, that there is significant uncertainty about the level of the target for the federal funds rate, which could be higher than what officials at the institution had estimated in September.
The evolution of the wording of the press release, published after two days of debate, takes into account the ever-evolving impact of the rapid rise in the Fed’s rate and the desire to raise it to a level “sufficiently restrictive to bring inflation down to 2% over time.
The “increases” in the target rate “will be appropriate,” the Fed said. “In determining the pace of future increases in the target range, the committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. “, she added.
The change in the institution’s wording bears witness to the broad debate that has taken place on the impact of monetary tightening on the economy and the risk that sharp rate hikes will weaken the financial system or trigger a recession.
While its recent rate hikes of 75 basis points were decided in the name of the need to act “quickly” to stem inflation, which is at a 40-year high, the central bank is now entering a more nuanced.
“VERY PREMATURE” TO THINK OF A BREAK
The rate target for federal funds (“fed funds”), the Fed’s main monetary policy instrument, is raised to between 3.75% and 4%, the highest level since early 2008.
The central bank has raised its rate in the past six meetings, making its fastest rally since the Paul Volcker era in the 1970s and 1980s.
Members of the Federal Open Market Committee (FOMC), the Fed’s monetary policy committee, remain “very attentive to inflationary risks,” the Fed added.
She pointed out that the economy appeared to be growing at a moderate pace, with job creation still “solid” and a low unemployment rate.
The signal sent by Jerome Powell, suggesting that the Fed is over with the aggressive phase of its tightening, was welcomed by the stock markets. But his comments about the likely higher-than-expected rate target and the “very premature” nature of the very idea of a pause sent Wall Street indices back into the red.
The Standard & Poor’s 500 index ended down 2.50%.
The yield on ten-year Treasury bills was up more than two basis points at 4.0796% and the dollar gained 0.48% against a basket of benchmark currencies.
In September, the median of the FOMC members’ forecasts gives a fed funds rate between 4.5% and 4.75% in 2023. Interest rate futures markets now reflect an estimated probability of 50 % that the target peaks at 5% or more next year.
The FOMC’s change in vocabulary “caught me a little by surprise,” said Derek Tang, economist at LH Meyer. The statement “was much more specific about a possible inflection than I thought. I thought (Jerome Powell) was going to reserve judgment until December but it looks like the committee has come to a consensus that they might slow down as of December, depending on how the data evolves.”
(Report Howard Schneider, with Michael S. Derby, French version Laetitia Volga, edited by Camille Raynaud)