The outsized hike, which was unfathomable to markets just months ago, lifts the central bank’s benchmark lending rate to a new target range of 3%-3.25%. This is the highest federal funds rate since the 2008 global financial crisis.
Wednesday’s decision marks the Fed’s toughest policy step since the 1980s to fight inflation. It would also likely cause economic pain to 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 would be,” Powell said Wednesday afternoon at a news conference after the central bank’s policy announcement, which came after a two-day meeting to set monetary policy .
The Fed’s updated summary of 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 percent in 2023, according to -higher than the 3.9% Fed officials forecast in June and significantly higher than the current rate of 3.7%.
US gross domestic product, the main gauge of economic output, was revised down to 0.2% from 1.7% in June. That’s well below analysts’ forecasts: Bank of America economists estimated GDP would be revised up 0.7%.
Inflation forecasts also rose. Core personal consumer spending, 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. This is an increase from June forecasts of 4.3% and 2.7% respectively.
Perhaps most important to investors looking for future guidance from the Fed is the outlook for the federal funds rate, which outlines what officials see as the appropriate policy path for raising interest rates going forward. The numbers released on Wednesday show that the Federal Reserve expects interest rates to remain high for years to come.
The forecast for the average federal funds rate was revised upward for 2022 to 4.4% from 3.4% in June. That number rose to 4.6% from 3.8% for 2023. The rate was also revised higher for 2024 to 3.9% from 3.4% in June and is expected to remain elevated at 2.9 % in 2025
Overall, the new forecasts point to an increasing risk of a hard landing, in which monetary policy tightens to the point of triggering a recession. They also provide some evidence that the Fed is willing to accept “pain” in economic conditions to reduce persistent inflation.
The higher prices mean consumers are spending about $460 more per month on groceries than they did at this time last year, according to Moody’s Analytics. Still, the labor market remains strong, as does consumer spending. House prices remain high in many areas, even though there has been a significant jump in mortgage rates. That means the Fed may feel the economy can swallow more aggressive rate hikes.