The Federal Reserve has announced that it has raised interest rates by 0.75 of a percentage point; the biggest increase since 1994.
On Wednesday, (Thursday, Australian time), the Fed said the move was made in a bid to address the fastest US inflation in four decades.
The Fed’s policy rate is now set at a range of 1.5 to 1.75 per cent.
It also projected that interest rates will reach 3.4 per cent by the year’s end and a peak of 3.8 per cent by the end of 2023.
Chairman Jerome Powell addressed the news at a press conference today, opening his speech with “one overarching message”.
“We at the Fed understand the hardship that high inflation is causing. We’re strongly committed to bringing inflation back down and we’re moving at expeditiously to do so,” Mr Powell said.
He continued: “It is essential that we bring inflation down if we’re to have a sustained period of strong labour market conditions that benefit all.”
Mr Powell conceded that the labour market is “much too tight” and inflation is “extremely high”, adding however that ongoing increases in that rate will be “appropriate”.
On Wednesday, the Federal Open Market Committee (FOMC) predicted that 3.7 per cent at the end of this year to 4.1 percent by 2024, which Mr Powell said are noticeably above its March projections.
The news comes after Mr Powell hinted at raising interest rates for this month and next after the benchmark interest rate increased by 0.5 per cent; the single highest increase since May 2000.
“If things come in better than we expect, then we’re prepared to do less. If they come in worse than when we expect, then we’re prepared to do more,” he said last month.
Mr Powell said the Fed’s long-term aim is to get inflation back to 2 per cent while keeping the labour market strong. However, they conceded that getting to that figure will “include some pain”.
“We are highly attentive to the risks high inflation poses to both sides of our mandate and we’re strongly committed to returning inflation to our 2 per cent objective,” Mr Powell said during Wednesday’s press conference.
Mr Powell added that the Fed will be looking for “compelling evidence” that inflation is coming down in the next few months and said he does not expect “moves of this size” to be common.
However, consistent with his comments last month, Mr Powell said a 0.50-basis point or a 0.75-basis point increase is most likely at the next meeting.
US recession now likely: BetaShares
On the back of the Fed’s rate hike, BetaShares chief economist David Bassanese predicted that the US was now likely to fall into recession within the next 12 months.
Mr Bassanese anticipated that, by the end of next year, the US National Bureau of Economic Research will have declared that a US recession began between June 2022 and June 2023.
“Indeed, U.S. economic growth was negative in the March quarter and there is now a reasonable chance that June quarter economic growth will be negative also, reflecting weakness in business investment and consumer spending,” he said.
US share markets do not appear to be priced for recession, Mr Bassanese suggested, with the potential for further falls across equity markets moving forward.
A peak-to-trough decline of 35 per cent – the average bear market decline during a US recession which Mr Bassanese described as his base case – would see the S&P 500 fall to 3,100 from a high of 4,796 on 3 January.
“For investors, periods of U.S. recession and associated bear markets can be difficult periods to endure. But the lesson of history is that markets do eventually bounce back,” he said.
“The Fed seems determined to learn the lessons of history and does not want to let supply side shocks and overly strong demand embed high inflation (and so also high interest rates) into the U.S. economy to the same degree evident in the 1970s.”
Mr Bassanese also predicted that buying opportunities would begin to emerge, particularly within growth/technology sectors, while value stocks will remain vulnerable to weakening inflation and commodity prices amid slowing global growth.
“As for Australia, as the saying goes, when the U.S. sneezes we catch cold. The local share market will not be immune to further Wall Street weakness, especially as we also face uncomfortably high inflation and likely aggressive RBA rates hikes in coming months,” he warned.
According to his predictions, the risk of a recession occurring in Australia during the next 12 months is at least 40 per cent and the S&P/ASX 200 is expected to suffer a peak-to-trough decline of at least 20 per cent that would see the index at 6,000 or lower.
