Fed hikes interest rates by 0.75 percentage points

The US Federal Reserve raised interest rates by 0.75 percentage points and said another adjustment of this magnitude is possible at its next meeting. This is part of an aggressive monetary tightening plan as the central bank tackles the highest US inflation in 40 years.

At the end of its two-day meeting, the Federal Open Market Committee on Wednesday raised interest rates to a target range of 1.50% to 1.75% and said it believed "further increases in the target range will be appropriate".

The decision marks an abrupt departure from the Fed's previously announced plans to raise interest rates by 0.50 percentage points for the second consecutive month, which were announced by policymakers before the start of a planned "blackout" period leading up to the meeting.

Esther George, president of the Fed's Kansas City branch, was the only dissenter and advocated keeping the previous guidance.

The rate hike follows two reports released on Friday that showed a stronger-than-expected rise in consumer prices in May and a rise in inflation expectations, suggesting Americans are more concerned about the economic outlook.

Fed Chair Jay Powell told a news conference after the decision that high inflation was a key factor behind the largest rate hike since 1994. Powell added that a 0.50 or 0.75 percentage point hike is likely at the next central bank meeting, although he doesn't expect adjustments of that magnitude to become

the norm Fed in a statement, noting that Russia's invasion of Ukraine has created "additional upward pressure" on inflation and weighed on economic activity. She added that the extended lockdowns in China to combat the Covid-19 surge have exacerbated supply chain disruption, causing prices to spike.

Fed officials also raised their interest rate forecasts significantly from three months ago, when they still expected the federal funds rate to reach 1.9 percent by the end of the year and 2.8 percent in 2023.

The "dot plot" of each rate forecast now suggests that the federal funds rate will rise to 3.4 percent by the end of 2022 - a level that suggests the Fed could plan at least one more hike this year, by 0.75 percentage points and could make some half-point adjustments before reverting to a more typical quarter-point cadence.

Powell explained that FOMC officials want to see interest rates at "slightly hawkish levels" by the end of the year.

More rate hikes are also expected in 2023, with the benchmark rate set to reach 3.8%, according to officials. Notably, the median forecast for the federal funds rate in 2024 is 3.4 percent, suggesting the Fed will need to scale back its rate hikes as the economy is likely to have slowed significantly by then.

Alongside the dotplot, the Fed released new economic forecasts that more directly suggest that the forthcoming monetary tightening - which includes a $9 billion balance sheet reduction - will come with "some pain," Powell acknowledged last month.

The Fed chair conceded that without major economic damage, the path to bringing inflation down "wouldn't get any easier".

"The worst mistake we can make is to fail, which is not an option," Powell said. "We need to restore price stability."

Annual gross domestic product growth is forecast to slow to 1.7 percent by the end of this year and remain at that level through 2023, according to the median of top officials' economic estimates. In March, they still assumed that the economy would grow by 2 percent or more every year until 2024.

Fed officials now expect core inflation to settle at 4.3 percent this year and 2.7 percent in 2023, slightly higher than forecast in March. Because of the impact of monetary tightening, the jobless rate is expected to rise more than the 3.5 percent officials had forecast in March by the end of next year. It is now expected to reach 3.9 percent in 2023 and 4.1 percent in 2024. It is currently 3.6 percent.

Powell said the economic trajectory outlined in the new projections reflects a "soft" landing.

"The probability of a soft landing is certainly not zero, but it's not high either, and it will be much more difficult to achieve that goal later this year," said Tony Rodriguez, Nuveen's head of fixed income.

The Fed is not alone in its efforts to combat inflation, which has become a global phenomenon. Central banks in advanced and emerging economies have been raising interest rates in a short period of time and are planning more hikes this year.

The European Central Bank called an emergency rate-setting meeting on Wednesday and announced emergency measures to tackle rising borrowing costs in the euro-zone's weaker economies.

US financial markets rallied after Powell said he expected a 0.75 percentage point hike to be relatively unusual. Overnight money markets were changing rapidly and traders were expecting less tightening into March, suggesting a policy rate between 3.75% and 4%.

The possibility of the Fed raising interest rates and curbing inflation without slowing growth helped the leading S&P 500 index climb 1.5 percent, recovering from its worst five-day slide since the early days of the coronavirus pandemic . The tech-heavy Nasdaq Composite gained 2.5 percent.

The $23 billion US Treasury bond market also reacted positively to Powell's comments, and the yield on the 10-year bond, which drives the cost of borrowing around the world, fell 0.17 percentage points to 3.3%. Yields fall when bond prices rise.