The Federal Open Market Committee (FOMC) raised the main U.S. interest rate on federal funds by 75 basis points (0.75 percentage point), to a range between 3% and 3.25%, in line with expectations.Read MoreCoinDesk
In a widely anticipated move, the Federal Reserve on Wednesday raised interest rates by 75 basis points (0.75 percentage point), marking the third consecutive time this year that central bankers decided for a hike of that magnitude.
The federal funds rate will rise to a range of 3% to 3.25%, the highest since late 2007. The rate had stayed near zero for more than two years. Traders are currently betting that the federal funds rate will go above 4.25% before central bankers pause the campaign.
Once the terminal rate – still a matter of disagreement among central bankers – is reached, some economists project it will likely stay at that level until inflation comes down significantly, possibly to the Fed’s target rate of 2%. Yet projections by the Federal Reserve’s own top officials are projecting rate increases through 2023.
“The Federal Reserve is in a difficult position,” former Treasury Secretary Lawrence Summers wrote in a tweet before the statement. “It will have to be quite aggressive to avoid overall easing in financial conditions.”
“Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low,” a statement by the Federal Open Market Committee (FOMC), a group of Fed officials that sets monetary policy said.
The decision comes after the August consumer price index (CPI), released last week, showed that inflation, excluding energy and food prices, rose 0.6% from the month before.
The worse-than-expected report kindled speculation that the central bank might raise rates for a full percentage point, or 100 basis points. More recently, the CME FedWatch tool showed that traders were pricing in a 18% chance for a full percentage-point hike.
A full-point hike this large would have been “radical and a signal to markets that the country’s central bank has lost control and is in panic mode, and that the likelihood of a recession has just increased considerably,” said Scott MacDonald, chief economist at Smith’s Research & Gradings.
With an increase of 75 basis points, the Fed stays in line with the magnitude of recent rate increases by the European Central Bank and Bank of Canada.
Joshua Lim, a crypto derivatives trading specialist, said a 75 basis point hike would be “well received,” given that the probability of a larger move was priced in by traders as well.
“With Fed terminal rates in the mid-4% range, one thing we continue to hear is markets’ interest in real-world yields on-chain. This is a growing area with on-chain credit to electronic market makers being the bulk of it,” he said.
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