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Fed set to raise rates by 0.75 points for third time in a row

The Federal Reserve will raise its key rate by 0.75 percentage point for the third time in a row on Wednesday as it appears to slow the overheated US economy.

The Federal Open Market Committee is expected to lift federal funds rates to a new target range of 3 percent to 3.25 percent after its two-day policy meeting, continuing its most aggressive monetary tightening campaign since the early 1980s.

Some economists have speculated that the Fed will opt for a full percentage point rate hike, but the chances predominantly in favor of a movement of 0.75 percentage point.

In addition to the interest rate decision, which is expected at 2 p.m. Dutch time, the US central bank will also publish a compilation of Fed officials’ interest rate forecasts – the so-called “dot plot” – for the period until the end of 2025.

This is expected to show officials committing to a “higher for longer” policy approach, with extra-large rate hikes this year that will push the Fed Funds rate to around 4 percent as they look to bolster their recent hawkishness in fighting inflation. .

Economists expect further rate hikes to be projected through 2023, bringing the peak of the fed funds rate closer to 4.5 percent. Officials are unlikely to cut key rates before 2024, Fed watchers say.

In June, the last time the forecasts were updated, officials predicted the fed funds rate would reach just 3.4 percent by the end of the year and 3.8 percent by 2023, before falling in 2024. At the time, the average estimate for the unemployment rate was 3.9 percent in 2023 and 4.1 percent in 2024.

On Wednesday, that unemployment rate is expected not only to rise, but to be pulled forward as officials more directly recognize the impact of their efforts to tackle inflation. The median estimate of the unemployment rate is now likely to be 4 percent by 2023.

Fed Chairman Jay Powell has also indicated that the U.S. central bank must see a “sustained period of below-trend growth” if it is to be successful in managing price pressures, suggesting officials’ gross domestic product forecasts may also move to the next level. will be reviewed below.

In June, policymakers predicted that inflation would decline closer to the Fed’s target of 2 percent, with growth falling just to 1.7 percent. Most economists now expect the US economy to plunge into recession next year, though they don’t expect officials to predict it yet.

The September meeting marks an important moment for the central bank, which this summer faced questions over its decision to restore price stability after Powell suggested the Fed deliberated on easing its aggressive monetary tightening and began to raise concerns. to worry about too tight a tightening.

At the annual central bankers’ symposium in Jackson Hole, Wyoming, last month, the chairman tried to counter that narrative by stating that the Fed “must stick to it until the job is done.”

Financial markets have adjusted the Fed’s new course and US Treasury yields have risen as interest rate expectations have risen.

The two-year Treasury, which is most sensitive to changes in policy outlook, is trading at around 4 percent, after hovering around 3 percent in early August. The return on the 10-year benchmark also recently rose above 3.5 percent for the first time since 2011.

US stocks recorded their biggest weekly loss in months last week.

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