MNI STATE OF PLAY: Fed Has 'Ways to Go' In Tightening Policy

The Federal Reserve strengthened its resolve to arrest accelerating prices Wednesday, pledging to keep raising interest rates toward 5% until growth is below trend, the labor market has cooled and clear evidence that inflation is moving back to 2%.

"We are taking forceful and rapid steps to moderate demand so it comes into better alignment with supply," Fed Chair Jerome Powell said after the FOMC lifted its benchmark overnight rate by 75 basis points for the third time in as many meetings to a 3%-3.25% range.

The 19-member FOMC also penciled in additional rate increases this year and next, with policymakers evenly split between an additional 100 bps and 125 bps of hikes this year and the median official forecasting rates to hit 4.6% by the end of 2023. About a third of policymakers saw rates needing to be as high as 4.9% next year. MNI reported ahead of the meeting that a significant spike in rate hike projections was likely.

"We'll need to bring our funds rate to a restrictive level and to keep it there for some time," Powell said. "We've just moved into the very lowest level of what might be restrictive. In my view and the view of the committee, there's a ways to go."

CLEAR EVIDENCE

Stocks sold off and yields surged across the curve shortly after the Fed decision, with the 2-year reaching a peak of 4.1168%, highest since 2007. The dollar also gained against a broad basket of currencies.

The Fed's September economic projections show rates beginning to fall only in 2024, when headline PCE inflation retreats to 2.3%. Inflation is expected to end the year at 5.4%.

Although energy prices have turned lower, "price pressures remain evident across a broad range of goods and services," Powell said, adding that officials continue to see upside risk to inflation.

It will be appropriate to slow the pace of rate hikes as the full effect of tightening financial conditions starts to cool inflation, but if high inflation becomes entrenched in public thinking and decision-making, then the cost of getting back to price stability rises, Powell said.

"Higher interest rates, slower growth and a softening labor market are all painful for the public that we serve, but they're not as painful as failing to restore price stability and having to come back and do it down the road again," he said. "We want to avoid that. We want to act aggressively now and get this job done and keep at it until it's done."

MODEST COOLING

Fed officials saw the unemployment rate rising to 4.4% next year and staying close to that level through 2025, several tenths above its estimated longer run level of 4.0%.

The Fed chair noted only "modest evidence" so far that the labor market is cooling off. Job openings and quits rates are down a bit and wage growth "may be flattening out," Powell said. Employers reported hiring an average of 378,000 workers per month over the last three months, moderating slightly from the 493,000 pace the six months prior.

"The labor market continues to be out of balance, with demand for workers exceeding the supply of available workers," Powell said.

The FOMC hasn't given up on the idea of a soft landing, he added, but the chances of one are likely to diminish if policy needs to be more restrictive or tighter for longer.