The Fed raises interest rates by three-quarters of a percentage point and promises more hikes to combat inflation.
The Federal Reserve raised benchmark interest rates by three-quarters of a percentage point on Wednesday, signaling that it will continue to raise rates well above the current level.
In order to reduce inflation, which is nearing its highest level since the early 1980s, the central bank raised the federal funds rate to a range of 3%-3.25%, the highest since early 2008, following the third consecutive 0.75 percentage point increase.
Powell first said “my colleagues and I are strongly committed to bringing inflation back down to our 2% goal.” The Fed policy statement indicated a resilient economy, highlighting “modest growth in spending and production.” Powell also stated, “We are focused on getting inflation back down to 2%. “We can’t fail to do that. I mean, if we were to fail to do that, that would be the thing that would be most painful for the people that we serve. So, for now, that has to be our overarching focus.”
Following the announcement, stocks fluctuated, with the Dow Jones Industrial Average most recently rising 280 points. As Fed Chairman Jerome Powell discussed the outlook for interest rates and the economy, the market pared its losses.Following the third consecutive 0.75 percentage point increase, the central bank raised its federal funds rate to a range of 3%-3.25%, the highest since early 2008.
As the Fed raises borrowing costs, growth is stalling. The Fed predicted on Wednesday that the economy would expand by just 0.2% this year and 1.2% in 2023, which is lower than its previous projection from June of 1.7% for both years.
It forecasts that the 3.7% unemployment rate would increase to 4.4% by the end of the year, far higher than its earlier projection of 3.9%. Additionally, the Fed’s preferred gauge of annual inflation, which is not the CPI, is anticipated to decrease from 6.3% in August to 5.4% by year’s end, which is somewhat higher than the prior projection of 5.2% made by Fed officials, and 2.8% by the end of 2023. That would be a little bit higher than the Fed’s 2% aim.
Powell, however, has argued that the Fed must raise rates in order to reduce consumers’ inflation expectations, which have the potential to influence actual price increases. By the end of next year, the 3.7% unemployment rate—well above its previous prediction of 3.9%—will grow to 4.4%.