The Federal Reserve Wednesday raised its benchmark interest rate by 75 basis points for the third straight month as it struggles to keep boiling inflation in check, a move that threatens to slow U.S. economic growth and exacerbate financial pain for millions of dollars. families and businesses.
The three-quarter percentage point increases in June, July and September – the most aggressive series of increases since 1994 – underline how serious Fed officials are in addressing the inflation crisis after a series of alarming economic reports. Politicians voted unanimously to approve the latest large increase.
The move places the key federal funds benchmark rate in a range of 3% to 3.25%, the highest since before the 2008 financial crisis. It marks the fifth consecutive rate hike this year.
In addition to the sharp rate hike, Fed officials plotted an aggressive path of rate hikes for the rest of the year. New economic projections released after the two-day meeting show politicians expect interest rates to hit 4.4% by the end of the year, suggesting another three-quarter percentage point hike is on the table.
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Officials plan to continue raising rates in 2023, before stopping at a 4.6% termination rate – well in tight territory – and finally lower rates slightly starting in 2024. This is a much more aggressive outlook. than officials established earlier this year. Policy makers see rates drop to 3.9% in 2024 and 2.9% in 2025.
The rate hike decision and the latest economic projections underscore how committed the Fed is to keeping inflation in check, even if it means risking an economic recession.
“We have to put inflation behind us,” Federal Reserve Chairman Jerome Powell said during a post-meeting press conference in Washington. “I wish there was a painless way to do it. There isn’t.”
Median projections imply that officials will tighten the federal funds policy rate by another 125 basis points this year, suggesting a 75 basis point increase in November and a 50 basis point increase in December. But Powell said no decision has yet been made on the magnitude of the hikes in the coming months and pointed out that officials are basing the decision on upcoming economic data.
Despite the series of aggressive rate hikes, however, inflation remained stubbornly high. Last month was even hotter than expected, with the Consumer Price Index, a broad measure of the price of everyday goods that includes gasoline, groceries and rentals, up 0.1% in August compared to the previous month, disappointing hopes of a slowdown. On an annual basis, inflation is ongoing 8.3%, a high of almost 40 years.
Even more worrying is the surge in core prices, which rose 0.6% in August from the previous month, a larger increase than in April, May, June and July, and a worrying sign that the underlying inflationary pressures in the economy they remain strong.
But efforts to fight inflation have potential risk of recession, with a growing number of Wall Street economists and firms predicting an economic downturn this year or next. Rising interest rates tend to create higher rates on lending to consumers and businesses, which slows the economy by forcing employers to cut back on spending. Mortgage rates have nearly doubled from a year ago to 6%, while some credit card issuers have raised their rates to 20%.
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Economists broadly agree that the risks of a recession have risen considerably this year and that avoiding a downturn in the near future will be increasingly difficult as the Fed tightens monetary policy.
Powell previously said that a “soft landing” – the sweet spot between containing inflation without crushing growth – is possible, but Wednesday seemed to deliver on that promise. The Fed chief admitted that a recession is possible and that securing a soft landing will be “very challenging”.
“The chances of a soft landing are likely to decrease as the policy has to be more tight or restrictive for longer,” he said. “However, we are committed to bringing inflation back to 2%. We believe that failure to restore price stability would mean much greater pain.”
Updated forecasts show that unemployment rises to 4.4% by the end of next year, compared to the current 3.7%. It is significantly higher than in June, when policy makers saw the unemployment rate soar to 3.7%. Estimates for economic growth, meanwhile, have been reduced to 1.2% in 2023 and 1.7% in 2024.
“With the new rate projections, the Fed is planning a hard landing – a soft landing is almost out of the question,” said Seema Shah, chief global strategist at Principal Global Investors. “Powell’s admission that there will be below-trend growth for a period should be translated as the central bank speaks in favor of ‘recession’. Times will get tougher from here.”