The Fed raises its rates and sharply lowers its economic forecasts | Economy

In a widely expected move, the Federal Reserve raised interest rates by three-quarters of a point on Wednesday as it tries to strangle inflation by curbing economic demand.

The central bank has also cut its economic forecast sharply, with its median expectation for gross domestic product growth now standing at 0.2% for the year, down from 1.7% in June. Unemployment will hit 3.8% this year, down from 3.7% earlier, and 4.4% for each of the next two years. The Fed also raised inflation expectations to 5.4% this year from 5.2% in June, while raising its inflation forecast for 2023 to 2.8% from 2.6% and for 2024 to 2. .3% against 2.2%.

The Fed’s forecast also sees it hike rates to a high of 4.6% in 2023, up from 3.8% in its June economic conditions summary.

Fed Chairman Jerome Powell spoke after the announcement and while noting a slowdown in economic activity, particularly in housing and business investment, he said the workforce remained “unbalanced” with a demand for workers exceeding the supply.

“We are taking strong and rapid action to moderate demand,” Powell said. “We will continue to work until we are done.”

Powell suggested the idea of ​​a “soft landing” where inflation returns to the preferred target of an average of 2% “declines” the more the Fed continues to tighten, but he added that no one knows. if or when a recession will occur, or how bad it might be.

Economic political cartoons

He said the Fed would rely on the incoming data and that at some point it should assess its policy and, if necessary, slow the rate of interest rate hikes.

“We are committed to getting to a restrictive level” and “getting there fairly quickly,” he said in response to a question about upcoming meetings and pricing decisions. Inflation “is not where we want it to be,” he added.

“The Fed was late to recognize inflation, late to start raising interest rates and late to start unwinding bond purchases,” said Greg McBride, chief financial analyst at Bankrate. “Since then, they have been playing catch-up. And they’re not finished yet.

The 75 basis point rise follows a similar increase in July that dampened the housing market amid a general slowing economy.

The increase will put additional pressure on consumers and businesses as borrowing costs rise and the prospect of a recession increases in the coming months.

“Today’s rate hike will have a quick impact on consumers, especially for short-term borrowing costs,” said George Ratiu, director of economic research at Realtor.com. “The funds rate serves as the basis for the prime rate, which is used by banks to set interest rates for credit cards, as well as auto and personal loans.”

“Consumers will see higher rates in the coming weeks,” Ratiu added. “That should have a ripple effect later this year as we enter the traditional holiday season. With higher borrowing costs and incomes that are not keeping up with inflation, consumers may find shrinking shopping budgets resulting in a shorter gift list.

Ratiu said the rate hikes will affect more than consumers and businesses are already dealing with inflation and rising wages for their workers.

“Additionally, with an increasingly likely economic downturn on the horizon, many businesses are scrambling to contain or cut spending,” he said. “While layoffs have been limited to certain sectors so far, we could see a growing wave of companies downsizing this winter.”

Markets sold off on the news, with the Dow Jones Industrial rapidly falling more than 200 points. However, the Dow reversed as Powell spoke, rising 280 points before closing in on a 200 point gain in volatile trading.