The oversized hike, which was unfathomable to markets just a few months ago, takes the central bank’s benchmark benchmark rate to a new target range of 3% to 3.25%. This is the highest federal funds rate since the global financial crisis of 2008.
Wednesday’s decision marks the Fed’s toughest policy move since the 1980s to fight inflation. It will also likely cause economic hardship for millions of American businesses and households by increasing the cost of borrowing for things like homes, cars and credit cards.
Federal Reserve Chairman Jerome Powell has acknowledged the economic pain this rapid tightening regime could cause.
“Nobody knows if this process will lead to a recession or, if so, how big that recession would be,” Powell said Wednesday afternoon at a press conference following the central bank policy announcement, which came after a two-day monetary policy meeting. .
The Fed’s updated summary of 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 hitting 4.4% in 2023. , higher than the Fed’s rate of 3.9%. 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 down to 0.2% from 1.7% in June. This is well below analysts’ estimates: Bank of America economists had estimated that GDP would be revised to 0.7%.
Inflation projections have also increased. Core personal consumption spending, the Fed’s preferred measure of price inflation, is expected to grow 4.5% this year and 3.1% in 2023, according to the Fed’s SEP. That’s up from June projections of 4.3% and 2.7%, respectively.
Perhaps most important for investors looking for forward guidance from the Fed is the projection for the federal funds rate, which outlines what officials believe is the appropriate policy path for rate hikes going forward. ‘coming. Figures released Wednesday showed the Federal Reserve expects interest rates to remain high for years to come.
The median federal funds rate projection has been revised upwards for 2022 to 4.4% from 3.4% in June. This number increases to 4.6% from 3.8% for 2023. The rate has also been revised up 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 the growing risk of a hard landing, where monetary policy tightens to the point of triggering a recession. They also provide evidence that the Fed is willing to accept the “pain” of economic conditions in order to bring down persistent inflation.
The higher prices mean consumers are spending about $460 more per month on groceries than this time last year, according to Moody’s Analytics. Yet the labor market remains solid, as does consumer spending. House prices remain high in many regions, even though there has been a sharp rise in mortgage rates. This means the Fed may think the economy can swallow more aggressive rate hikes.
This story is growing and will be updated.