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The Federal Reserve is still committed to containing inflation and may increase rates even farther than initially anticipated, even though it may scale back the magnitude of its upcoming rate increases.
Fed rate increases may be more aggressive than anticipated as Powell vows to crush inflation.
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Key Points

  1. Jerome Powell, the chairman of the Fed, pledged to fight inflation and suggested the institution may need to hike interest rates more than initially anticipated.

  2. As a result, traders gambled that the Fed may now raise rates above 5% before halting, which caused stocks to decline and bond yields to rise.

  3. As anticipated, the Federal Reserve left the option of scaling back rate increases open.

The Federal Reserve announced Wednesday that it will account for the economy's lag in the effects of higher rates by increasing its target fed funds rate by 75 basis points, or three-quarters of a point. The initial statement, which was made public at 2:00 p.m. ET, was considered as dovish since it suggested rate increases might be more gradual.

Jerome Powell, the chairman of the Federal Reserve, stressed in his 2:30 p.m. briefing that the central bank will keep fighting increasing broad price inflation until it can declare victory and bring inflation to its target of 2%. In September, consumer inflation was increasing at an annual rate of 8.2%.

According to Diane Swonk, chief economist at KPMG, "his words that they'll be hiking rates strongly and intelligently are incredibly crucial because it really hits to the heart of the matter, which is that they know they have to create some pain with the increase in unemployment." "That was always going to happen. But they don't want to cause needless suffering. They are aware that rate increases spread globally.


In his remarks, Powell emphasized that the Fed's window for a smooth economic landing is closing, but he also talked tough on rates. The labor market is still robust. According to Dow Jones, economists anticipate that the September employment data would reveal 205,000 new jobs were created and that the unemployment rate stayed at a low 3.5%.

In the media briefing, Powell stated that "we still have some way to go" and that "incoming data since our last meeting implies that the ultimate level of interest rates will be higher than previously envisaged."

According to Swonk, the Fed is conceding that it will be adjusting the timing of rate increases to prevent the economy from suffering unnecessary harm.

So far, it has been fairly hawkish. Really, it's not what I was expecting. According to Michael Schumacher, head of macro strategy at Wells Fargo, "He's hanging in there." "Powell believes the bias is that they should tighten their belts more than they would otherwise consider in order to purchase insurance. He said that considering pausing is way too early. They won't be stopping any time soon.

 

Following a brief surge, stocks dropped significantly, and bond yields increased. Traders in the futures market wagered that the fed funds terminal rate, which was just over 5% prior to the meeting, would increase to 5.09% by May. The Fed is anticipated to stop rising interest rates at a certain point, known as the terminal rate. The fed funds target rate range is now 3.75% to 4% following the increase on Wednesday.

 

According to Jim Caron, head of macro strategies for global fixed income at Morgan Stanley Investment Management, "They're telling you they're willing to stop at a particular level and let that marinade in the market in order to bring inflation down."

According to Caron, the market currently anticipates a rate higher than the median objective for the terminal rate set by the Fed. Fed officials predicted a median of 4.6% for September, with a range of 4.5% to 4.75%. According to the market, the Fed would likely adopt a policy rate of 5%, possibly 5.25%, he said.

After a streak of four 75 basis point increases, according to Bank of America's senior U.S. economist Michael Gapen, a 50 basis point increase in December is now possible.

Powell is saying that even though the pace may slow for legitimate reasons, we should slow down for risk management reasons, according to Gapen. But he was also claiming that the majority of what they observed, particularly in the labor markets and inflation, would make them think that the terminal rate was likely greater than they had initially assumed.

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