The Federal Reserve made history on Wednesday by approving a third consecutive 75-basis-point rate hike in an aggressive move to tackle inflation. White-hot inflation has plagued the US economy.
The hike, which was barely understood by markets a few months ago, took the central bank’s key lending rate to a new target range of 3%-3.25%. This is the highest Fed funds rate since the 2008 global financial crisis.
Wednesday’s decision marks the central bank’s toughest policy move since the 1980s to fight inflation. It would cause economic pain for millions of American businesses and households by raising the cost of borrowing for things like homes, cars and credit cards.
Federal Reserve Chairman Jerome Powell acknowledged the economic pain this rapid tightening regime could cause.
“No one knows whether this process will lead to a recession or, if so, how significant that recession will be,” Powell told a news conference following the Fed’s policy announcement Wednesday afternoon. .
A summary of the central bank’s updated economic projections, released Wednesday, reflected that pain: The quarterly report showed a less optimistic outlook for economic growth and the labor market, with the average unemployment rate rising to 4.4% in 2023, higher than the central bank’s 3.9%. Officials forecast that in June and will be significantly higher than the current rate of 3.7%.
US gross domestic product, a key measure of economic output, slowed to 0.2% from 1.7% in June. That’s below analysts’ estimates: Bank of America economists estimate GDP will adjust to 0.7%.
JPMorgan Chase CEO warns policymakers to ‘prepare for the worst’
Inflation forecasts also rose. The central bank’s SEP showed that core personal consumption expenditures, the central bank’s preferred gauge of rising prices, will rise 4.5% this year and 3.1% in 2023. This is 4.3% and 2.7% respectively in June projections.
Most important to investors looking for forward guidance from the Fed is the forecast of the federal funds rate, which outlines what officials consider the appropriate policy path for rate hikes going forward. Numbers released Wednesday show the Federal Reserve expects interest rates to rise for years to come.
The average federal funds rate was revised upward to 4.4% in 2022 from 3.4% in June. That number rises from 3.8% to 4.6% by 2023. The rate is expected to rise to 3.9% in 2024 and 2.9% in 2025 from 3.4% in June.
Overall, the new projections show a growing risk of a hard landing, where monetary policy tightens to the point of triggering a recession. They also provide some evidence that the central bank is willing to accept “pain” in economic conditions in order to reduce persistent inflation.
The higher prices mean consumers are spending $460 more per month on groceries than this time last year, according to Moody’s Analytics. However, the job market remains strong, as does consumer spending. Despite significant increases in mortgage rates, home prices remain high in many areas. That means the central bank may feel the economy can swallow more drastic rate hikes.