The Federal Reserve delivered its second major rate hike in succession Wednesday, amid one of the most aggressive tightening in decades, while adding it sees "ongoing increases" in the months ahead despite a weakening forecast for the world's biggest economy.
The Fed lifted its Fed Funds rate by 75 basis points, matching the biggest move since 1994, to a range of 2.25% to 2.5%, and said near-term rate moves would be needed in order to combat the faster since the early 1980s. Fed Chairman Jerome Powell had said in June that he didn't expect outsized rate hikes to be a "common" tool going forward, but was likely shocked by the faster-than-expected reading for headline inflation of 9.1%.
Powell told reporters in Washington Wednesday, however, that the Fed 'wouldn't hesitate' to execute a larger rate hike if the Open Markets Committee were to deem it appropriate.
"Recent indicators of spending and production have softened," the Fed said in a statement issued alongside the rate increase. "Nonetheless, job gains have been robust in recent months, and the unemployment rate has remained low."
"Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures," the statement added. "The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals."
U.S. stocks extended gains following the Fed decision, with the Dow Jones Industrial Average marked 377 points higher on the session and the S&P 500 rising 88 points on the session. Benchmark 10-year Treasury note yields, fell 3 basis points lower to 2.734%.
The U.S. dollar index, meanwhile, fell 0.7% from its near 20-year high against a basket of its global peers to trade at a session-low 106.48 in the immediate wake of the Fed announcement.
"The Fed believes they are closing in -- or even at -- the neutral rate," said Jason Brady, CEO at Thornburg Investment Management in Santa Fe, New Mexico. "While I don’t think they will pause in September, they likely feel like they have gotten back from 'behind the curve'."
The CME Group's FedWatch tool now suggests a 39.6% chance of another 75 basis point hike in September, with bets on a smaller 50 basis point move at 55.7%, while 2-year note yields fell to 2.972% as Powell spoke to the media in Washington.
The Atlanta Federal Reserve's GDPNow forecasting tool, a real-time benchmark, suggests U.S. economic growth has continued to contract in the third quarter, and is shrinking at a 1.2% clip, ahead of tomorrow's second quarter GDP data from the Commerce Department.
Global central banks are starting to accelerate their inflation fight, as well, with the European Central Bank lifting its benchmark interest rate for the first time in eleven years on July 13.
The bigger-than-expected move, which added 50 basis points to all of the ECB's key rates, took the central bank's deposit facility into positive territory for the first time since 2014.
The Bank of Canada lifted its key lending rate by 100 basis points earlier this month, the largest single-day move since 1998, to 2.5%, adding that it had "underestimated inflation" since the spring of last year and that more increases will be needed in order to tame consumer price increases.
