The Fed prepares a big rate hike as the waters get rough for the world’s central banks

By Howard Schneider

WASHINGTONSep 21 – The Federal Reserve is expected to raise interest rates by three-quarters of a percentage point for the third time in a row, signaling how much higher and how fast borrowing costs must rise to rein in a potentially corrosive bout of inflation.

The decision, to be announced at 2:00 p.m. local time (1800 GMT), will mark a new move in a synchronized shift in stance by major central banks that is testing the resilience of the global economy and the ability of countries to manage exchange rate shocks while the value of the dollar it shoots up

Although most investors expect the Federal Reserve to raise its interest rate by 75 basis points, to the range of 3.00%-3.25%, markets could be unsettled by the updated quarterly economic projections to be released alongside with the monetary policy statement.

Such projections will show where Fed policymakers think interest rates are headed, how long it will take for inflation to fall, and how much “pain” is likely to be inflicted on US jobs and economic growth in the future. the way.

If the last few months are any prologue, that rewritten economic script will point to a tougher-than-expected fight, with the Fed’s benchmark interest rate set to exceed 4% by the end of 2022, versus 3.4% was expected when the last set of projections was published in June, and an increase in unemployment.

“With little evidence in hand that inflation pressures are easing, (Chairman Jerome Powell) will likely re-emphasize the Fed’s commitment to do what is necessary to bring inflation on target, even if it means risking a recession.” Deutsche Bank economists wrote late last week. “They anticipate tighter monetary policy and further labor market pain.”

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Deutsche Bank expects that the US central bank will eventually have to raise its policy rate to around 5.00%, a level that is close to the high of 5.25% seen from mid-2006 to 2007, when policymakers The Fed’s policy makers were concerned about a bubble in the US housing market and that it could amplify stress throughout the global financial system.

Powell will offer a press conference at 2:30 p.m. to explain the latest policy decision and his tone will determine whether it is interpreted as a next step in favor of tightening monetary policy with more of the same ahead or as a last rate hike “early”, before the Federal Reserve returns to more conventional rate hikes of 50 or 25 basis points, sensing that it reaches a stopping point.

Powell has had to correct himself in real time about the Fed’s likely trajectory twice this year. In June, after he largely ruled out raising rates by three-quarters of a percentage point, a surprise jump in inflation flummoxed the Federal Open Market Committee.FOMCfor its acronym in English) in charge of making monetary policy and pushed its members towards the higher increase.

In July, Powell’s comment that the Fed might move to smaller, incremental rate hikes was interpreted as a sign of an imminent shift in monetary policy.

Since then, the Fed chief’s tone has become very aggressive and, with the central bank’s preferred measure of inflation more than three times over its 2% target, another dose of harsh words is anticipated.

“The risks are still tilted towards higher interest rates and we expect a meeting of the FOMC relatively aggressive,” Citi economists wrote on Tuesday.

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