On Wednesday, the Federal Reserve hiked its target interest rate by three-quarters of a percentage point to prevent a disruptive spike in inflation, while forecasting a weakening economy and growing unemployment in the coming months.
The rate increase was the largest announced by the US central bank since 1994, and it came after recent statistics indicated little headway in the central bank’s fight to contain a steep rise in prices.
US central bank policymakers also signaled a speedier path of future rate rises, more closely aligning monetary policy with a sharp change in financial market estimates of what it would take to keep price pressures under control this week.
“Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices and broader price pressures,” the Federal Open Market Committee said in a statement after its last two-day meeting in Washington. “The committee is strongly committed to returning inflation to its 2 percent objective.”
The statement went on to blame extra price pressures on the Ukraine crisis and China’s lockdown policies.
Fed Chair Jerome Powell told reporters following the decision that officials “came to the view” that additional frontloading was required to move rates to a more neutral range more rapidly. “Seventy-five basis points seemed like the right thing to do at this meeting, and that’s what we did.”
Furthermore, Powell said that a quarter-point or half-point hike would “most likely” be the proper conclusion of the central bank’s next meeting in late July. Nonetheless, Powell said that he does not anticipate rises of the magnitude of Wednesday’s 75-basis-point increase to be “be common.”
The action raised the short-term federal funds rate to a range of 1.50 percent to 1.75 percent, and Fed officials at the median projected it would rise to 3.4 percent by the end of this year and 3.8 percent in 2023 – a significant shift from March projections that the rate would rise to 1.9 percent this year.
Monetary policy tightening was followed by a reduction in the Fed’s economic forecast, with the economy now expected to slow to a below-trend 1.7 percent pace of growth this year, unemployment increasing to 3.7 percent by the end of the year, and continuing to increase to 4.1 percent through 2024.
While no Fed policymaker predicted a recession, the range of economic growth predictions dipped near zero in 2023, and the federal funds rate was expected to decline in 2024.
In volatile trading, US equities erased gains immediately after the delivery of the statement and economic estimates. Treasury rates in the United States increased, while the US currency gained versus a basket of currencies.
Interest rate futures markets also indicated that the Fed is likely to replicate Wednesday’s 75-basis-point rise at its next policy meeting in July. However, the higher possibility – at more than 50% – was for a 50-basis-point hike at the September meeting.
“The Fed is willing to let the unemployment rate rise and risk a recession as collateral damage to get inflation back down. This isn’t a Volcker moment for Powell given the magnitude of the hike, but he is like a Mini-Me version of Volcker with this move,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments.
The latest Fed predictions represent a departure from prior central bank attempts to portray tighter monetary policy and inflation management as compatible with stable and low unemployment. The 4.1 percent unemployment rate projected for 2024 is currently somewhat higher than the level considered by Fed policymakers to be compatible with full employment.
Since March, when Fed officials predicted they could increase rates and keep inflation under control while keeping the unemployment rate at 3.5 percent, inflation has persistently lingered at a 40-year high, with little sign of hitting the peak Fed policymakers planned for this spring.
Even with the more dramatic interest rate cuts announced on Wednesday, authorities expect inflation to be 5.2 percent this year and 2.2 percent in 2024, as assessed by the personal consumption expenditures price index.
Inflation has become the Fed’s most important economic concern, and it has started to affect the political landscape as well, with public morale deteriorating as food and fuel costs rise.
Kansas City Fed President Esther George was the lone policymaker to vote against the decision on Wednesday, preferring a half-point increase.