The Federal Reserve on Wednesday stepped up its aggressive fight against high inflation by agreeing to the third straight super-sized increase in interest rates and signaling more big hikes before the end of the year.
Officials said they would raise their benchmark federal-funds by 0.75 percentage point to a range of 3% to 3.25%. They also penciled in another 125 basis points in rate hikes by year end — much more than Wall Street expected.
Higher interest rates are primed to slow the economy this year and next by raising the cost of borrowing for consumers and businesses.
The resulting slowdown is also expected to reduce hiring, trigger more layoffs and push unemployment to as high as 4.4% from the current level of 3.7%, according to the Fed’s latest forecast.
The Fed aims to raise its benchmark rate to a midpoint of 4.4% by the end of the year, up from the prior estimate of 3.8%. The central bankers also sees a peak or “terminal” rate of 4.6% for its policy rate in 2023, and in keeping with their “higher for longer” rhetoric, the Fed doesn’t see any rate cuts until 2024.
“We will keep at it until the job is done,” said Fed Chairman Jerome Powell, referring to the bank’s effort to tame inflation. “I wish there was a painless way to do that. There isn’t.”
What the Fed has steered away from, however, is forecasting a recession.
Powell said no one knows if a recession will take place, but he held out hope that the Fed could squelch inflation without doing grave damage to the economy.
Economists are less optimistic.
“It is going to be very difficult to walk a line between taming inflation and at the same time not dumping the economy into a recession,” said chief economist Joshua Shapiro of MFR Inc. “History suggests that the task will be formidable, if not impossible.”
The Fed’s ultimate goal is to reduce inflation to pre-pandemic levels of 2% or less. The central bank believes it can reach its inflation target by 2025.
“We are taking forceful and rapid steps” to curb price pressures, Powell said. Easing up too soon, he said, could make it harder to restrain inflation in the long run.
Until earlier this month, investors had hoped the Fed would not need to take such stern measures. Yet the August consumer price data, which showed a jump in core inflation, was a “game changer” because it showed that fed efforts to bring down inflation haven’t made much of a dent.
At the Fed’s Jackson Hole retreat last month, Powell bluntly said the central bank would do what it takes no matter the short-term cost.
“These are the unfortunate costs of reducing inflation,” Powell said then. “But a failure to restore price stability would mean far greater pain.”
He reiterated his message on Wednesday.
The Fed has raised its benchmark interest rate with remarkable speed and doing so has raised concerns among economists that the central bank will miss signs that the economy is seriously slowing and in risk of falling into recession.
At the same time the Fed is raising rates, it is allowing its balance sheet to shrink, a policy known as “quantitative tightening.”
The vote on today’s rate hike was unanimous.