The Fed hikes rates by half a percentage point and sees the economy nearing a standstill

WASHINGTON, Dec 14 (Reuters) – The Federal Reserve hiked interest rates by half a percentage point on Wednesday and forecast borrowing costs to rise by at least another 75 basis points by the end of 2023, as well as a rise in unemployment and a near standstill in economic growth.

The US Federal Reserve’s forecast that interest rates will rise to 5.1% in 2023 is slightly higher than investors were expecting ahead of this week’s two-day monetary policy meeting and appeared rather biased to move higher.

Only two out of 19 Fed officials saw the benchmark federal funds rate stay below 5% over the next year, a signal that they still feel the need to jump into their fight against inflation, which is at 40-year highs ran.

“The (Federal Open Market) Committee is very vigilant on inflation risks… Ongoing increases in the target range will be appropriate to achieve monetary policy tight enough to bring inflation back to 2% over time,” it said the Fed said in a statement almost identical to the one it released at its November meeting.

The new statement, which was approved unanimously, was released after a meeting at which officials cut rate hikes issued at the previous four meetings by three-quarters of a percentage point. The Fed’s interest rate, which started the year at near-zero levels, is now within a target range of 4.25% to 4.50%, the highest since late 2007.

US stocks turned negative after the release of the policy statement. In the US Treasury market, which plays a key role in transmitting Fed policy decisions to the real economy, 2-year and 10-year bond yields rose. The dollar appreciated against a basket of currencies.

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“Taken together, today’s statement and economic forecasts tell a simple but compelling story: this Fed is not ready to pivot in any meaningful way until it sees sustained and conclusive evidence of a reversal in inflationary pressures,” said Karl Schamotta, chief markets strategist at Corpay .

Fed Chair Jerome Powell is expected to hold a press conference at 2:30 p.m. EST (1930 GMT) to provide more details about the monetary policy meeting, which was the last of 2022.

The new Federal Funds Rate Outlook, a rough estimate of where central bank officials believe they can pause their current cycle of interest rate hikes, was released alongside economic forecasts that show a broader battle against inflation that is yet to come and is set to ease as the year progresses will develop into a near recessionary situation.

Inflation, based on the Fed’s preferred measure, will remain above the central bank’s 2% target through at least the end of 2025 and still be above 3% by the end of next year.

The projected median unemployment rate is set to rise to 4.6% over the next year from the current 3.7%, a rise above historical levels associated with a recession.

Gross domestic product is expected to grow just 0.5% next year, just as estimated for 2022, before rising to 1.6% in 2024 and 1.8% in 2025, levels believed to be the long-term potential of the economy.

Reporting by Howard Schneider and Ann Saphir; Additional reporting by Lindsay Dunsmuir and Saqib Ahmed; Edited by Paul Simao

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