The Federal Reserve raised its target interest rate by three-quarters of a percentage point today to stem a disruptive rise in inflation.
The Fed also projected an economic slowdown and rising unemployment in the coming months.
The rate hike was the biggest announced by the Fed since 1994 and came after recent data showed little progress in its battle to rein in a sharp rise in prices.
Fed officials also signaled a faster path of rate hikes, more closely aligning monetary policy with a rapid shift this week in financial market views on what it will take to rein in price pressures.
“Inflation remains elevated, reflecting pandemic-related supply and demand imbalances, higher energy prices and broader price pressures,” said the Fed’s Federal Open Market Committee, which sets policies, in a statement at the end of their final two-day meeting in Washington.
“The committee is strongly committed to bringing inflation back to its 2% target,” he added.
The statement went on to cite the Ukraine war and China’s lockdown policies as sources of additional inflationary pressures.
The action raised the short-term fed funds rate to a range of 1.5% to 1.75%, with Fed officials at the median projecting it would rise to 3.4% by the end of this year and by 3, 8% in 2023.
This marked a substantial change from March projections, in which the rate rose to 1.9% this year.
The tightening of monetary policy was accompanied by a downgrade of the Fed’s economic outlook, with the economy now seeing a slowdown to a below-trend 1.7% growth rate this year, unemployment rising to 3, 7% at the end of this year and continues to increase to 4.1% through 2024.
While no Fed policymaker projected an outright recession, the range of economic growth forecasts approached zero in 2023 and the fed funds rate was seen falling in 2024.
The Fed’s new projections are a break from the central bank’s recent efforts to project tighter monetary policy and inflation control as consistent with low and stable unemployment.
The 4.1% unemployment rate seen in 2024 is now slightly above the level that Fed officials generally consider to be consistent with full employment.
Since March, when Fed officials projected they could raise rates and rein in inflation with the unemployment rate hovering around 3.5%, inflation has hovered stubbornly at a 40-year high, with no sign before it reaches the peak that Fed policymakers had hoped would come this spring.
Even with the most aggressive interest rate measures taken today, policymakers see inflation measured by the personal consumption expenditures price index at 5.2% this year and slowing only gradually to 2.2% in 2024.
Inflation has become the most pressing economic issue for the Fed and has also begun to shape the political landscape, with household sentiment worsening amid rising food and gasoline prices.
Kansas City Fed President Esther George was the only policymaker who dissented from today’s decision, preferring a half percentage point increase.