The Federal Reserve raised interest rates three-quarters of a percentage point in its fight against the worst inflation in 40 years, but said future borrowing cost hikes would come in smaller steps, to assess the “accumulated tightening of monetary policy”.
Fed Chairman Jerome Powell said the change of pace could come as soon as the next central bank meeting in December, but also warned that there remains great uncertainty about the level of interest rates and that they could end up being higher than had been estimated in September.
The time to reassess the pace of rate hikes “is coming,” Powell said at his news conference following the Federal Open Market Committee’s decision to raise rates three-quarters of a point for the fourth consecutive meeting.
“It can happen even in the next meeting or the next one,” Powell said. “No decision has been made. We’ll probably have a discussion about it at the next meeting.”
The new wording of the monetary policy statement took note of the still-evolving impact of the Fed’s rapid pace of rate hikes, and the desire to fine-tune the fed funds rate to a level “constraining enough to bring inflation back into the 2% over time.
“Continued increases in the target range will be appropriate,” the US central bank said on Wednesday at the end of its latest two-day policy meeting.
While they did not rule out any future decision, the officials said that “in determining the pace of future increases in the target range, the (Federal Open Market) Committee will take into account the accumulated tightening of monetary policy, the lags with which the monetary policy affects economic activity and inflation, and economic and financial developments”.
The bank has set the target federal funds rate at a range between 3.75% and 4.00%, the highest since early 2008.
The Fed statement said officials remained “very alert to inflation risks,” opening the door to further hikes.
The economy, the Fed noted, appears to be growing modestly, with job gains still “robust” and unemployment low.
The signal that the Fed seems to be done with the phase of monetary policy tightening initially caused a broad rally in US stock and bond markets, but Powell’s comments about the likelihood of rates rising more than expected that had been estimated triggered a change in trend.
At the September meeting, the median estimate of policymakers put the maximum federal funds rate between 4.5% and 4.75% next year. Rate futures markets now imply a 50/50 chance that rates will rise to 5% or more next year.
The change in the FOMC statement “came a bit by surprise,” said Derek Tang, an economist at forecasting firm LH Meyer.
The Fed’s statement “was much more definitive about a possible move lower than I thought. I thought (Powell) would reserve much more judgment until December, but it seems the committee reached a consensus that they could reduce the pace as early as December, depending on how the data goes.
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