Federal Reserve Chairman Jerome Powell holds a press conference after the Fed’s rate-setting meeting on June 15.
Powell said inflation led the Fed to raise interest rates by 75 basis points in June and did not expect that to become a regular occurrence.
‘Inflation expectations are rising, so I think aggressive action is needed this time,’ he said.The Fed needs to act pre-emptively so it has more options later.
‘Inflation has surprised on the upside since the May rate-setting meeting,’ Mr. Powell said. ‘We will look for strong evidence that inflation is coming down in the coming months.’
‘The FOMC is moving rapidly to more normal levels,’ he said.The Fed’s next rate decision will be a “binary choice” between a single 50 basis point increase or a 75 basis point increase.
U.S. stocks rose, Treasury yields tumbled and the dollar fell after the rate decision.
Why 75 basis points? Consumer inflation expectations are one of the main reasons
Late last week, the University of Michigan’s survey of consumer sentiment for early June showed that consumers’ inflation expectations rose further.Respondents expect inflation to hit 5.4 per cent in the coming year, the highest since 1981, and longer-term inflation expectations have also risen.
Mr. Powell said the preliminary reading on consumer confidence for June was “alarming, and we noticed it.Today’s decision to raise interest rates by 75 basis points was driven by consumers’ inflation expectations, in addition to the higher than expected CPI in May.
The Fed firmly anchored its 2% inflation target
Mr Powell said the Fed was firmly committed to bringing inflation down.’The Fed has the tools we need to restore price stability,’ Mr. Powell said. The Fed must bring down inflation to help generate more job creation.”It’s clear right now that the labor market is extremely tight and inflation is too high,’ he said.
‘The data show that inflation remains high in the short term but has fallen sharply in the medium term,’ Mr. Powell said. ‘Inflation expectations remain, and they were an important factor in the 75 basis point rate hike.’He believes long-term expectations point to a sharp fall in US inflation.What matters is that long-term inflation expectations remain low.The Fed “will unswervingly” anchor its inflation target at 2 per cent.
‘The Fed is highly focused on the risks of high inflation and strongly committed to bringing it down,’ Mr. Powell said. ‘The Fed’s policies have adapted and will continue to do so.’Mr Powell also stressed that inflation could surprise further and that Fed policy would remain flexible.
Macroeconomics: The Fed is not trying to induce a recession in the United States
On the macro economy, Mr Powell said the US economy was strong and able to cope with tighter financial policy.U.S. real GDP growth picked up in the current quarter, and tighter financial conditions should temper demand, he said.Real estate activity, fixed investment in goods and so on appear to be slowing.Wage growth is strong and demand in the Labour market is strong, but supply remains weak.The Fed expects the labor market to become more balanced and ease the pressure on businesses from excessive wage growth.
Mr Powell said the Fed was not now trying to induce a recession in the US and there were “no signs” of a broader slowdown in the economy and consumer spending had not slowed appreciably.
On quantitative tightening (QE), Powell said markets seem to be happy with the Fed’s QUANTITATIVE tightening (QT) process.There is no reason to think that THE FOMC’s QT will cause non-liquidity problems.
On housing, Mr Powell said the FOMC was watching mortgage rates and the housing market.The FOMC is uncertain how much impact policy will have on housing, which remains very tight and needs to balance supply and demand.
Dot plot: another 175 basis points need to be raised this year
Based on the dot plot, officials forecast that the benchmark rate would rise to 3.4 per cent by the end of the year, implying another 175 basis points of rate rises this year.Their median forecast was that the median rate would peak at 3.8% in 2023, with five officials predicting it would exceed 4%;The median forecast in March was for the fed funds rate to rise to 1.9% this year and 2.8% next year.
Based on the dot plot, officials forecast that the benchmark rate would rise to 3.4 per cent by the end of the year, implying another 175 basis points of rate rises this year.
Their median forecast was that the median rate would peak at 3.8% in 2023, with five officials predicting it would exceed 4%;The median forecast in March was for the fed funds rate to rise to 1.9% this year and 2.8% next year.
Barclays: Fed back on pace for 50 basis point rate hikes in July
Barclays, the UK investment banking giant, was one of the first major banks to raise the Fed’s June forecast to 75 basis points, saying it expects the fed to resume its 50 basis point pace of rate increases in July.
Barclays reversed course a
fter the latest U.S. consumer price inflation report, correctly predicting Wednesday’s third-quarter rate hike.Barclays economists wrote in a note after the meeting:
Other topics: epidemic, geopolitical conflicts
At the press conference, Powell did not talk much about the war in Ukraine, international oil prices, food supply and demand, and did not mention the epidemic.
Market reaction: Central banks followed suit
After the Fed meeting resolution, some emerging market central banks have followed suit.
Bahrain’s central bank said it would raise its key policy rate, the one-week deposit rate, by 75 basis points to 2.25%.The overnight deposit rate was raised by the same amount to 2.25%, the four-week deposit rate to 3.25% from 2.5%, and the lending rate to 3.75% from 3.0%.
The Central bank of the United Arab Emirates also raised interest rates by 75 basis points, with the benchmark rate on overnight deposits linked to the Fed’s Reserve Balance rate (IORB) rising by 75 basis points from Thursday.
The Saudi Monetary Authority (SAMA), the equivalent of a central bank, on Wednesday raised the repurchase rate by 50 basis points to 2.25 per cent from 1.75 per cent and the reverse repurchase rate to 1.75 per cent from 1.25 per cent.SAMA said the move was consistent with its goal of maintaining monetary and financial stability, given the changing domestic and international situation.
Kuwait’s central bank raised its discount rate by 25 basis points to 2.25 per cent from 2.00 per cent after the Fed’s move.Kuwait’s dinar is pegged to a basket of currencies, including the DOLLAR.Kuwait said it had more flexibility in its interest rate policy to track a basket of currencies.
Brazil’s central bank raised rates by 50 basis points to 13.25 per cent.Brazil’s central bank is expected to raise interest rates by 50 basis points next time, and the rate hike could be further reduced, the statement said.It said the central bank’s restrictive interest rate cycle was appropriate and that vigilance was needed against Brazil’s inflation situation.
Separately, BMO expects the Bank of Canada to raise interest rates by 75 basis points at its July meeting.