NEW YORK (Reuters) – The Federal Reserve raised its benchmark overnight interest rate by three-quarters of a percentage point on Wednesday in an effort to cool the most intense breakout of inflation since the 1980s, with “ongoing increases” in borrowing costs still ahead despite evidence of a slowing economy.
The rate-setting Federal Open Market Committee lifted the policy rate to a range of between 2.25% and 2.50% in a unanimous vote. Coming on top of a 75-basis-point hike last month, and smaller moves in May and March, the Fed has raised its policy rate by a total of 225 basis points this year to a level now that most Fed officials feel has a neutral economic impact, effectively marking the end of pandemic-era monetary stimulus. STORY:
MARKET REACTION:
STOCKS: The S&P 500 added to gains and was up 1.41%
BONDS: The 10-year U.S. Treasury note yield rose 2.7685%; The yield on the two-year slipped to 3.0446% after the Fed statement.FOREX: The dollar briefly went up but was last off 0.12%
COMMENTS:
MARVIN LOH, SENIOR GLOBAL MARKET STRATEGIST, STATE STREET, BOSTON
“You certainly can view the policy statement as hawkish but it is pretty consistent with what they have been saying for the last couple of meetings – they are going to continue to hike – estimates had them going into restrictive territory, they are at neutral now and they continue to think they are going to need to go into restrictive territory. Theoretically, the dollar should be stronger in an environment where it is hawkish but it was as expected and we have had a lot of movement in the dollar so far this month. It is as expected and we are all just going to have to wait to see what Powell says.”
“Certainly equities have been choppy but generally higher and that is around the view that the tightening cycle might not be as aggressive as initially thought. We’ve had dollar strength, we’ve had a more inverted curve, for the most part you’ve got mixed signals but just a lot of wide ranges that are trading around that I would say things are just in those ranges, if you will. I don’t expect the Fed to be able to actually dovishly pivot at this point. After the last CPI, after the last employment report – it is still hot. Certainly we’ve got data that is starting to moderate and in certain instances like the housing market showed that it is ready to move a bit more aggressively, but they kept the statement around being committed to getting inflation to 2% so to me I keep that in the back of my mind as being the most important thing they are looking at right now.”
MICHAEL PEARCE, SENIOR US ECONOMIST, CAPITAL ECONOMICS, NEW YORK
“The Fed’s decision to raise interest rates by a further 75bp to 2.25%-2.50% takes them close to their ‘neutral’ level. With inflation set to fall from here and further signs of economic weakness, we suspect officials will be more cautious raising rates from here, shifting to a smaller 50bp move in September.”
BRIAN COULTON, CHIEF ECONOMIST, FITCH RATINGS
“The Fed’s statement acknowledged the recent softening in activity data but this is given short-shrift in the presence of what is still a very robust labor market and unrelenting inflation pressures. Despite this being another outsize rate increase of 75 bps, the Fed has still only raised interest rates back into line with its own estimates of the long-run neutral rate. Given where core inflation and the unemployment rate currently stand this underscores that monetary policy adjustment still has quite a long way to go. Market expectations that the Fed may be cutting rates again next year look premature.”
JACK ABLIN, CHIEF INVESTMENT OFFICER AND FOUNDING PARTNER, CRESSET CAPITAL, CHICAGO
“This was widely expected and encouraging that it was a unanimous decision. This does represent the most aggressive series of fed moves since Volcker.”
“Anything other than the outcome that told us would have been a negative surprise. Too little would’ve undermined confidence in the Fed and too much would have undermined confidence in the economy. It was well telegraphed and properly balanced against expectations.”
“They’re still highly attentive to inflation risks. It should underscore their single-minded focus on inflation.”
(Compiled by the U.S. Finance & Markets Breaking News team)