U.S. markets fell sharply after Federal Reserve Chair Jerome Powell signalled that the central bank is likely to raise interest rates one more time this year to help lower inflation.
As was widely expected, the Fed held interest rates steady at current levels following its latest policy meeting. However, Powell sounded a hawkish tone when speaking to media.
Specifically, the central bank governor said that one more interest rate increase is likely by year’s end, and that there are likely to be fewer rate cuts than previously expected in 2024.
“The process of getting inflation sustainably down to 2% has a long way to go,” said Powell in speaking to reporters.
The U.S. central bank left its trendsetting Fed Funds Rate at its current level of 5.25% to 5.50%, which is the highest level in 22 years.
The Fed Funds Rate represents the interest that banks charge each other for overnight lending, but also spills over into many forms of consumer loans, including for home mortgages.
The latest inflation data from America showed that consumer prices were 3.7% higher in August of this year than in the same month of 2022. The Fed targets inflation at a 2% annualized rate.
While inflation is down from an annualized peak of 9.1% seen in June 2022, it has been ticking higher in recent months, due largely to higher energy prices.
Since the end of June, crude oil prices have risen more than 20% with a barrel of crude oil now trading at more than $90 U.S., up from below $70 U.S. in the spring of this year.
With energy prices complicating matters and inflation pushing higher, Powell indicated that the Fed expects one further rate hike to be issued at one of the central bank’s two remaining policy meetings this year.
Powell also indicated that he expects the Fed’s current monetary policy tightening regime to end after one final interest rate increase, which would mark a dozen such hikes since the policy tightening began in March 2022.
However, the Fed also appears to be leaning towards a more restrictive policy and a higher-for-longer approach to interest rates moving forward.
The U.S. central bank’s internal projections show the likelihood of one more interest rate increase this year, followed by two rate cuts in 2024.
If that projection holds, it would put the Fed Funds Rate around 5.1% at the end of next year.
Stocks fell sharply on the latest interest rate announcement by the Fed, with the S&P 500 index falling nearly 1% and the Nasdaq index closing down 1.5%.
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