The Federal Reserve instituted a dramatic interest rate hike on Wednesday, the latest in a series of borrowing cost increases, as the central bank tries to dial back near-historic inflation while avoiding an economic downturn.
The Fed raised its benchmark interest rate by 0.75%, repeating the same hike it imposed at each of the last two meetings. Prior to this year, the Fed last matched a hike of this magnitude in 1994.
The move arrives a little more than a week after a higher-than-expected inflation report revealed that prices rose slightly in August, worsening the cost woes for U.S. households and sending the S&P 500 tumbling for its worst day of 2022.
The Fed has put forward a string of aggressive interest rate hikes in recent months as it tries to slash price increases by slowing the economy and choking off demand. But the approach risks tipping the U.S. into a recession and putting millions out of work.
"Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures," the Federal Reserve said in a statement on Wednesday.
"Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low," the statement added.
Speaking at a conference held by the conservative-leaning Cato Institute, Fed Chair Jerome Powell said earlier this month that the central bank must act "forthrightly, strongly" to dial back inflation.
Before the release, traders expected rates to reach 4.5% in early 2023 before falling about a half point by the end of the year.
Powell and his colleagues, slammed for a slow initial response to escalating price pressures, have pivoted aggressively to catch up and are now delivering the most aggressive policy tightening since the Fed under Paul Volcker four decades ago.
The updated forecasts also showed unemployment rising to 4.4% by the end of next year and the same at the end of 2024 — up from 3.9% and 4.1%, respectively, in the June projections.
Estimates for economic growth in 2023 were marked down to 1.2% and 1.7% in 2024, reflecting a bigger impact from tighter monetary policy.
Inflation peaked at 9.1% in June, as measured by the 12-month change in the US consumer price index. But it’s failed to come down as quickly in recent months as Fed officials had hoped: In August, it was still 8.3%.
Job growth, meanwhile, has remained robust and the unemployment rate, at 3.7%, is still below levels most Fed officials consider to be sustainable in the longer run.
The failure of the labor market to soften has added to the impetus for a more-aggressive tightening path at the US central bank.
Fed action is also taking place against the backdrop of tightening by other central banks to confront price pressures which have spiked around the globe. Collectively, about 90 have raised interest rates this year, and half of them have hiked by at least 75 basis points in one shot.