Federal Reserve hikes key interest rate 0.75 percentage point, projects economic slowdown
The Federal Reserve on Wednesday raised its benchmark interest rate by 0.75 percentage point and signaled it plans to keep rates higher for longer as it tries to douse red-hot inflation.
The Fed's target interest rate is now in the range of 3% to 3.25%, the highest level in 14 years. The bank's rate-setting panel also projected that the Federal Funds rate would hit 4.4% by year-end, up sharply from a projection of 3.4% in June, and 4.6% in 2023, up from a previous estimate of 3.8%.
"Based on our expectation that the Fed will take the rates to 4% by December, this will be one of the fastest episodes of Fed tightening in the post-war period," Brian Coulton, chief economist with Fitch Ratings, said in an email.
Higher interest rates are likely to be a big drag on economic growth, officials noted in projections released along with the Fed's latest policy statement. Fed officials predicted GDP will expand by just 0.2% this year and 1.2% next year, down from a rosier forecast in June of 1.7% growth in 2022 and 2023.
Stock markets slumped on the news, with the S&P 500 and Dow Industrial Average closing down 1.7% on the day and the Nasdaq losing 1.8%.
"We will keep at it"
A downturn due to rising borrowing costs would take a toll on jobs. Fed officials expect the nation's unemployment rate jump to 4.4% next year, a substantial increase from its current level of 3.7%.
Despite the economic impact of ratcheting up rates, Fed Chair Jerome Powell sounded a hawkish note in affirming his commitment to lowering inflation.
"Reducing inflation will likely require a sustained period of below-trend growth, and it will very likely require a softening of labor conditions," he said at a press conference Wednesday.
"We will keep at it until we are confident the job is done," Powell added.
Markets are already responding to the Fed's moves. Average fixed mortgage rates hit 6% last week, their highest level in 14 years and a major reason that home sales have tumbled. Credit card borrowing costs have reached their highest level since 1996, according to Bankrate.com.
At the same time, broader inflation has been slow to respond to the Fed's interest-rate hikes, even as pandemic-fueled supply-chain disruptions have eased.
"We have seen some supply-side healing but inflation has not really come down," Powell said.
Consumer prices have dipped from their peak earlier this summer, but core inflation — which excludes the cost of food and fuel — rose in August. Seemingly nonstop price increases have emerged as the most pressing economic issue this year, with costs of everything from housing to groceries outpacing wage increases and squeezing consumers.
Bitter pill
Powell acknowledged that the Fed risks putting the economy into a recession by hiking rates quickly, but he maintained that such a move is necessary to maintain price stability. He reiterated his view that the job market is "extremely tight," with demand for workers exceeding the number of those available to work.
Some economists think a recession is increasingly likely given the Fed's aggressive push to slow the economy by raising the cost of borrowing and investing.
"[W]ith the Fed's third consecutive 75 basis point rate hike over the past four months, market participants should be looking for cover to weather the upcoming storm," Charlie Ripley, senior investment strategist at Allianz Investment Management, said in an email. "Overall, today's policy action is largely reflective of the economic backdrop, and in order to slow the economy the Fed clearly has to be aggressive."
The Associated Press contributed reporting.