“We feel the economy is very strong and will be able to withstand tighter monetary policy,” Powell said in March.
Slow growth and high unemployment “are all painful for the people we serve, but not as painful as the inability to restore price stability and get back on the road,” Powell said. Will have to,” Powell said.
Breaking it down: The central bank hasn’t been as tough as some investors thought it might be. Some were pushing for the first full-point hike in the Fed’s modern history. Yet there were signs in the central bank’s projections that it intends to stay tight, even if it means pushing the economy into rocky territory.
Peter Bockwar, chief investment officer at Bulkley Financial Group, said the Fed had now entered a ‘danger zone’ in terms of the rate shocks they were inflicting on the US economy.
The Fed’s key interest rate is now set between 3% and 3.25%. Earlier, its top policymakers indicated that rates could reach 3.4 percent by the end of this year, which would mean the hiking cycle is almost over.
Not anymore. The Fed is now penciling in rates at 4.4% through the end of the year, implying even bigger hikes in the next few months.
At the same time, the Fed has revised its expectations for unemployment. It currently expects the unemployment rate to reach 4.4 percent in 2023, up from a forecast of 3.9 percent in June.
What it means: The Fed isn’t backing down, even if its strong medicine for the U.S. economy is hard to swallow.
“Our view is that the Fed funds rate of 4% is the highest the economy will tolerate, and the Fed is clearly threatening to raise rates above that level,” said Mark Haefele, at UBS Global Wealth Management. Chief Investment Officer, told clients after the announcement.
It’s a message that could hold up markets in the coming weeks as Wall Street digests it.
U.S. stocks traded between gains and losses before ending the day lower on Wednesday. The S&P 500 fell 1.7 percent. Meanwhile, the US dollar continues its advance.
Paul Donovan, chief economist at UBS Global Wealth Management, told me that volatility will likely persist because investors are unsure how the Fed is measuring its success. In addition, many of the factors driving inflation numbers — such as the war in Ukraine and the drought — are beyond the central bank’s control.
“What’s going to add to the market uncertainty is that the Fed is not saying what it’s trying to do,” Donovan said. But this Is Admit that it might hurt.
Japan intervened to prop up the yen for the first time in 24 years.
Japan tried to appreciate its currency for the first time in 24 years on Thursday by buying the yen to prevent it from further weakening against the US dollar.
“The government is concerned about these extreme fluctuations and has just taken decisive action,” Japan’s Vice Finance Minister for International Affairs Masato Kanda told reporters Thursday after the unusual move.
When asked by a reporter if “decisive action” meant “market intervention”, Kanda replied in the affirmative.
Important context: Thursday’s decision marks the first time since 1998 that the Japanese government has intervened in the foreign exchange market by buying the yen.
Earlier on Thursday, the Bank of Japan announced it would maintain its ultra-loose monetary policy, signaling its determination to stay out among G7 countries raising interest rates to control inflation.
Why it matters: The action underscores the global impact of Fed policy and the U.S. dollar’s strong rally, which is pushing other currencies lower. This makes it more expensive for other countries to import food and fuel, and raises domestic prices for fans. (More on this below.)
Inflation in Japan has jumped to its fastest annual pace in eight years, exceeding the Bank of Japan’s target.
High inflation costs are increasing.
Central banks are hammering home that they will do whatever it takes to control inflation. Meanwhile, leaders and policymakers are warning that failure is not an option.
“If we don’t bring inflation down, it will hurt the most, because rising food and energy prices are a pain for those who are better off — a tragedy for the poor,” Georgieva said. Georgieva said. “So when we advocate a forceful attack on inflation, we think of the poor first.”
He added that central banks have no choice but to raise interest rates in an effort to combat inflation.
“The main question before us is to restore conditions for growth, and price stability is an important condition,” Georgieva said.
Big picture: Georgieva’s comments are a reminder of the real-world consequences of decisions policymakers are weighing right now. But a sharp rise in interest rates can also lead to global losses.
Also today: Initial U.S. jobless claims for last week arrive at 8:30 a.m. ET.
Coming tomorrow: A first look at the latest Purchasing Managers’ Indexes for top economies will provide an indication of how they’re holding up.