The Federal Reserve stepped up its aggressive fight against high inflation on Wednesday by agreeing to its third consecutive super-big hike in interest rates and signaling more major hikes before the end of the year.
Officials said they would increase their benchmark federal funds by 0.75 percentage points to a range of 3% to 3.25%. They also factored in an additional 125 basis points in rate hikes by the end of the year — far more than Wall Street had expected.
The news caused US stocks DJIA SPX to plummet again. The yield on the 10-year Treasury Note BX:TMUBMUSD10Y also rose to 3.53%, not far from an 11-year high.
Higher interest rates are intended to slow the economy this year and next by increasing borrowing costs for consumers and businesses.
The resulting slowdown is also expected to lead to fewer staff, more layoffs and a rise in unemployment to 4.4% from its 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 its previous estimate of 3.8%. Central bankers also see a peak or “final rate” of 4.6% for its key rate in 2023, and in keeping with their “higher for longer” rhetoric, the Fed sees no rate cuts until 2024.
“We will keep going until the job is done,” said Fed Chair Jerome Powell, referring to the bank’s efforts to tame inflation. “I wish there was a painless way to do that. There isn’t.”
What the Fed is straying from, however, is predicting a recession.
Powell said no one knows if a recession will occur, but he hoped the Fed could contain inflation without seriously hurting the economy.
Economists are less optimistic.
“It will be very difficult to walk a line between taming inflation while not dumping the economy into recession,” said chief economist Joshua Shapiro of MFR Inc. “History suggests the task will be formidable, if not impossible.”
The ultimate goal of the Fed is to reduce inflation to pre-pandemic levels of 2% or less. The central bank expects to be able to meet its inflation target in 2025.
“We are taking strong and swift steps” to curb price pressures, Powell said. Easing too quickly, he said, could make it harder to contain inflation in the long run.
Until earlier this month, investors hoped that the Fed would not have to take such harsh measures. But August’s consumer price data, which showed a jump in core inflation, was a game changer as it showed that inflation-reduction efforts were not doing much.
At the Fed’s Jackson Hole retreat last month, Powell bluntly said the central bank would do whatever it takes regardless of the short-term costs.
“These are the unfortunate costs of curbing inflation,” Powell said at the time. “But if price stability is not restored, that would mean a lot more pain.”
On Wednesday, he repeated his message.
The Fed has raised its benchmark rate at a remarkable rate, leading to concerns among economists that the central bank will miss signals that the economy is seriously slowing and is at risk of sliding into recession.
At the same time, the Fed is raising interest rates and shrinking its balance sheet, a policy known as “quantitative tightening.”
The vote on today’s rate hike was unanimous.