Fed policymakers believe that higher interest rates will last for a longer time

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By Ann Saphir

WASHINGTON (Reuters] – Federal Reserve policymakers are expecting to increase U.S. interest rate further and keep them higher for longer than they anticipated. This signaled Wednesday that squeezing high inflation would likely have a greater impact on the economy than they expected.

Jerome Powell, Fed Chair said that Fed’s recent projections by policymakers don’t necessarily predict a recession. However, he suggested that the risk was worth it and that the Fed doesn’t plan to cut rates to offset the loss.

Powell said that in order to lower inflation, Powell suggested that there will need to be a sustained period with below-trend growth and some softening on labor conditions.

The U.S. central banking officials see the policy-rate, currently in the 4.25%-4.5% area after Wednesday’s fifty-basis point increase, rising up to 5.1% by next year according to the median estimate in Fed’s quarterly summary. This was published at the close of the Fed’s two-day meeting.

It is half of what they predicted for September.

Projections show that the rate could drop to 4.1% in 2024. Again, this is lower than what was estimated three months ago.

There was wide disagreement among central bankers over that decline. Seven out of 19 policymakers predicted the rate would not drop as fast and five expected a steeper fall.

They expect that it will take longer to reach the Fed’s 2% inflation goal. Projections show inflation as the Fed’s preferred measure of inflation – the personal consume expenditures price index, currently at 6% – cooling to 3.1% by the last quarter of next year, and to 2.5% by end 2024.

Policymakers predicted that inflation would rise to 2.8% in 2023 and 2.3% in 2024 as of September.

RESTRICTIVE

The Fed said that it would tighten its policy until it is “sufficiently restrictive” to reduce inflation. This year’s rate hike was the most aggressive in 40 years.

Powell indicated Wednesday that although the Fed is moving “close”, he said it is not yet there. He said that despite two months’ worth of data showing some cooling, inflation appears to be starting 2023 higher than central banks had expected.

Powell indicated that rates would need to rise to keep pace.

How restrictive? https://www.reuters.com/graphics/USA-FED/REAL/lgpdkknxwvo/chart_eikon.jpg

And even though it is true that keeping rates stable while inflation falls actually means that policy is becoming more restrictive, this will not be the end of the story, he stated.

He stated, “I wouldn’t see us cut rates until the Committee feels confident that inflation is moving down at 2% on a sustained basis,” in his strongest rebuke to market expectations of rate cuts in 2023’s second half.

The policymakers anticipate that interest rate hikes will push the unemployment rate from 3.7% to 4.6% in 2023’s final quarter and continue there until 2024. Three months ago, the unemployment rate was at 4.4%.

A rise in unemployment rates above 5%, also known as the Sahm Rule, after Claudia Sahm, a former Fed staffer, is likely to signal a recession.

If there is a steady labor force, then an increase of this size would cause more people to be unemployed than a million.

Wednesday’s projections reveal that Fed policymakers have become less optimistic about the outlook for growth. They project a median GDP growth of 0.5% next year, as opposed to September’s forecast of 1.2%. Two Fed policymakers expect the economy to shrink in the next year.

Carl Riccadonna, BNP Paribas economist, stated that the GDP forecast and unemployment forecast are combined. “It is clearly recession.”

(Reporting by Ann Saphir, Editing by Andrea Ricci).

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