Federal Reserve raises interest rates by .75 points to fight inflation

Federal Reserve Powell

The Federal Reserve raised interest rates again by .75 percentage points in its latest fight against inflation, despite growing concerns that the central bank is slowing the economy so aggressively that households and businesses will soon feel the pain.

The rate increase, announced at the end of the Fed’s two-day policy meeting on Wednesday, was the fifth of the year and the third consecutive three-quarter point hike. With few signs that its actions are working yet, the Fed has ramped up its moves to cool demand and keep prices from rising. Officials are forging ahead despite the risk that the job market softens or the economy goes into recession.

Indeed, new economic projections released Wednesday afternoon show officials expect the unemployment rate, which is currently 3.7 percent, will end the year at 3.8 percent, before rising to 4.4 percent by the end of 2023. Generally, if the unemployment rate climbs by half a percentage point, a recession follows.

The Fed also significantly downgraded its forecasts for economic output. The last time the Fed released projections, in June, it expected the economy to grow 1.7 percent in 2022. That figure was revised down to 0.2 percent. Officials also expect inflation will remain high at the end of the year - 5.4 percent using the Fed’s preferred gauge - before falling closer to normal levels next year.

On future rate hikes, Fed officials penciled in another increase of three-quarters of a percentage point, and one of half-a-percentage point, for the two remaining meetings of the year, though any actions depend on what unfolds in the economy. The projections also show rates climbing slightly next year, before cuts in 2024.

“Recent indicators point to modest growth in spending and production,” bank officials said in a statement announcing the rate hike. “Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.”

These big actions bring big risks that the Fed could soon force a recession. So far, the job market and consumer spending - two crucial economic engines - have stayed resilient through the Fed’s sharp rate hikes, and Americans may even be feeling better about inflation. But interest rate increases operate with a lag, and before too long, the full weight of what the bank has already done may become clear. The markets have grown increasingly anxious about a recession, and stocks have tumbled in recent weeks on investor anxiety that the Fed won’t ease up on its policies anytime soon.