The Fed: Fed will tolerate a recession, and 5 other things we learned from Powell’s presser

by | Sep 21, 2022 | Stock Market

The Federal Reserve on Wednesday voted to raise its benchmark interest rate by 0.75 percentage points, the third unusually large rate hike in a row. But there were a lot of moving parts to the Fed’s message. Here are six things we learned from the central bank’s economic projections and Fed Chairman Jerome Powell’s press conference on Wednesday:

The Fed will tolerate a recession According to the Fed’s forecast, the unemployment rate will rise to 4.4% next year. That’s 0.7% higher than the current unemployment rate. “There has never been a situation where the unemployment rate rose more than about 0.5% without the economy entering recession. So the FOMC forecast is an implicit admission that a recession is likely, unless something extraordinary happens,” said Roberto Perli, head of global policy at Piper Sandler. Powell said that “no one knows whether this process will lead to a recession, or, if so, how significant that recession would be,” he said. He wouldn’t give his estimate of the odds of a recession. Read: Does the Fed’s forecast signal a recession aheadPowell was persuaded to front-load rate hikes There was a debate about whether the Fed should go slow and feel its way toward higher rates, or to go big right now, and Powell was persuaded by the front-load camp, said Julia Coronado, founder of MacroPolicy Perspectives. The Fed’s front-loaded strategy is to hike rates aggressively. Once they reach their destination, Fed officials will stop and let all the lags of monetary policy play out. “They are not far from their destination at this pace,” Coronado said. The …

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