The US Federal Reserve raised interest rates by another 75 basis points on Wednesday, with officials forecasting a sizeable economic slowdown in 2022.
That puts the fed funds rate, or the rate at which the Fed lends to banks, at 3.25%, up from 2.5% previously.
“Reducing inflation will likely require a sustained period of below-trend growth,” Federal Reserve Chairman Jerome Powell said. “We’ll keep doing it until we’re sure the job is done.”
The Fed’s latest quarterly economic forecast, also released on Wednesday, shows a decidedly less optimistic view of the central bank’s ability to rein in inflation. Officials don’t expect to see their favorite measure of inflation, the personal consumption expenditures index, anywhere near the Fed’s 2% target through 2024.
So while three months ago officials predicted interest rates would be at 3.4% by the end of 2022, they now see the Fed raising them to 4.4%, according to the summary of economic projections, which compiles the views of the Fed’s board of governors.
They also do not see the Fed backtracking on interest rate hikes in 2023 as they had forecast in June. The median opinion of Fed officials is that the Fed funds rate will be 4.6% by the end of next year and then 3.9% by the end of 2024.
Fed Officials Cut Their 2022 GDP Forecast
Fed officials also lowered their outlook for economic growth for 2022 in the face of declining output, global shortages and monetary tightening. They now see the US economy growing 0.2% this year, down from the 1.7% they forecast in June.
The Fed sees a resilient job market
Fed officials take a less gloomy view of the labor market, predicting that the unemployment rate, currently 3.7%, will rise to 3.8% by the end of the year and 4.4% by the end of next year.
But some are skeptical about the Fed’s projections, given the pace of expected increases in interest rates. “An unemployment rate that rises from 3.5% to 4.4% is not an unemployment rate that peaks at 4.4%,” wrote Skanda Amarnath, CEO of Employ America. “Everyone should assume that the Fed is committed to engineering a recession.”