The super-big hike, unfathomable to markets just months ago, is pushing the central bank’s benchmark lending rate to a new target range of 3 to 3.25%. That is the highest interest rate since the global financial crisis in 2008.
Wednesday’s decision marks the Fed’s toughest policy move since the 1980s to fight inflation. It will also likely cause economic pain for millions of US businesses and households by driving up the cost of loans for things like homes, cars and credit cards.
Federal Reserve Chairman Jerome Powell acknowledged the economic pain this rapid tightening regime could cause.
“Nobody knows whether this process will lead to a recession or, if so, how big that recession would be,” Powell said Wednesday afternoon during a news conference following the central bank’s policy announcement, which came after a two-day meeting on monetary policy-making. .
The updated summary of the Fed’s economic projections, released Wednesday, reflects that pain: The quarterly report showed a less optimistic outlook for economic growth and the labor market, with the median unemployment rate rising to 4.4% in 2023, higher than the 3.9% Fed officials projected in June and significantly higher than the current rate of 3.7%.
US gross domestic product, the main measure of economic output, was revised downwards in June from 1.7% to 0.2%. That’s well below analysts’ estimates: Bank of America economists had estimated GDP would be revised to 0.7%.
Inflation forecasts also grew. Core spending on personal consumption, the Fed’s preferred measure of rising prices, is expected to reach 4.5% this year and 3.1% in 2023, the Fed’s SEP showed. That is higher than the forecasts for June of 4.3% and 2.7% respectively.
Perhaps most important for investors seeking future advice from the Fed is the Federal Funds rate projection, which outlines what officials think is the correct policy path for future rate hikes. Data released on Wednesday show that the Federal Reserve expects interest rates to remain high in the coming years.
The projection of the median federal fund rate has been revised upwards to 4.4% for 2022, from 3.4% in June. That number will increase from 3.8% for 2023 to 4.6%. The rate was also revised higher for 2024 to 3.9% from 3.4% in June and is expected to remain high at 2.9% in 2025.
Overall, the new projections show that the risk of a hard landing is increasing, with monetary policy tightening so much as to trigger a recession. They also provide some evidence that the Fed is willing to accept “pain” in economic conditions in order to curb ongoing inflation.
The higher prices mean that consumers are spending about $460 per month more on groceries than this time last year, according to Moody’s Analytics. Nevertheless, the labor market remains strong, as does consumer spending. House prices remain high in many areas, even though there has been a sharp spike in mortgage rates. That means the Fed may feel the economy can take more aggressive rate hikes.
This story is under development and will be updated.