The Federal Reserve raised its target interest rate by three-quarters of a percentage point on Wednesday to stem a disruptive surge in inflation, and projected a slowing economy and rising unemployment in the months to come.
The rate hike was the biggest made by the U.S. central bank since 1994, and was delivered after recent data showed little progress in its inflation battle.
U.S. central bank officials flagged a faster path of increases in borrowing costs to come as well, more closely aligning monetary policy with a rapid shift this week in financial market views of what it will take to bring price pressures under control.
“Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices and broader price pressures,” the central bank’s policy-setting Federal Open Market Committee said in a statement at the end of its latest two-day meeting in Washington. “The committee is strongly committed to returning inflation to its 2% objective.” The statement continued to cite the Ukraine war and China lockdown policies as sources of inflation.
The action raised the short-term federal funds rate to a range of 1.50% to 1.75%, and Fed officials at the median projected the rate increasing to 3.4% by the end of this year and to 3.8% in 2023 – a substantial shift from projections in March that saw the rate rising to 1.9% this year.
The stricter monetary policy was accompanied with a downgrade to the Fed’s economic outlook, with the economy now seen slowing to a below-trend 1.7% rate of growth this year, unemployment rising to 3.7% by the end of this year, and continuing to rise to 4.1% through 2024.
While no policymaker projected an outright recession, the range of economic growth forecasts edged toward zero in 2023 and the federal funds rate was seen falling in 2024.
The projections are a break with recent Fed efforts to cast tighter monetary policy and inflation control as consistent with steady and low unemployment. The 4.1% jobless rate seen in 2024 is now slightly above the level Fed officials generally see as consistent with full employment.
Since March, when Fed officials projected they could raise rates and control inflation with the unemployment rate remaining around 3.5%, inflation has stubbornly remained at a 40-year high, with no sign of it reaching the peak Fed policymakers hoped would arrive this spring.
Even with the more aggressive interest rate measures taken on Wednesday, policymakers nevertheless see inflation as measured by the personal consumption expenditures price index at 5.2% through this year and slowing only gradually to 2.2% in 2024.
Kansas City Fed President Esther George was the only policymaker to dissent in Wednesday’s decision in preference for a half-percentage-point hike.
Inflation has become the most pressing economic issue for the Fed and begun to shape the political landscape as well, with household sentiment worsening amid rising food and gasoline prices.
Here are key takeaways from the Federal Reserve’s interest-rate decision and forecasts on Wednesday:
* The Fed raised its benchmark rate by 75 basis points — the biggest increase since 1994 — to a range of 1.5%-1.75%, in line with investors’ and economists’ expectations that shifted on Monday following media reports that the central bank would likely consider such a move in wake of pickup in inflation data; Kansas City Fed President Esther George dissented in favor of a 50 basis-point hike.
* New dot-plot projections showed sharp increase from March, with federal funds target rising to 3.4% by year-end — implying another 175 basis points of tightening this year — and 3.8% in 2023, before falling to 3.4% in 2024; prior forecasts in March were for a 1.9% rate this year and 2.8% in 2023 and 2024.
* A couple of major changes to the statement: FOMC adds a line saying it’s “strongly committed to returning inflation to its 2% objective” and removes prior language that said the FOMC “expects inflation to return to its 2% objective and the labor market to remain strong”.
* Economic projections showed a much bumpier soft landing expected, with the unemployment rate rising from 3.7% at end-2022 to 4.1% in 2024; growth forecasts were cut to 1.7% in 2022 and 2023, from 2.8% and 2.2% in March; Fed officials still expect inflation to come down significantly in 2023.
* Reiterates path on balance-sheet reduction that took effect June 1, shrinking bond portfolio by $47.5 billion a month and stepping up to $95 billion in September.(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)
