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 to expand by just 0.2% this year and 1.2% next year, down from a rosier forecast in June for 1.7% growth in 2022 and 2023.
Stock markets slumped on the news, with the S&P 500 falling 1.5% from morning levels to 3,830.
A downturn 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 borrowing costs, Fed Chair Jerome Powell reaffirmed his commitment to bringing down inflation.
“We have both the tools we need and the resolve to restore price stability for families and businesses,” Powell said in a press conference after the Fed’s latest policy statement. “We are moving our policy stance purposefully to a level that will be sufficiently restrictive to bring inflation to our target of 2%,” he said.
In August, Powell warned that the Fed’s monetary tightening would “bring some pain” for Americans. Wall Street has interpreted that to mean the central bank will keep hiking rates even if it hurts economic growth, including triggering a recession, and the Fed’s most recent hike is in line with that position.
The bank’s rate-setting body on Wednesday noted that inflation remains “elevated” and said it was “highly attentive to inflation risks.” Consumer 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.
This is a developing story. The Associated Press contributed reporting.