Fed Chair Jerome Powell and other monetary policymakers telegraphed a 50-basis-point increase to interest rates this month after raising rates that amount in May, which followed a 25-point increase in March. But the Fed went off-script and raised rates 75 basis points following the two-day Federal Open Market Committee (FOMC) meeting – the largest rate hike since 1994 – and indicated a faster pace of rate increases is coming, signaling it has grown more concerned with elevated inflation and is trying to actively get upward price pressure under control sooner. The action raised the Fed funds rate to a range of 1.50% to 1.75%, and the midpoint of the projection range from officials shows rates increasing to 3.4% by the end of this year and to 3.8% in 2023 – a substantial upward shift from previous projections.
“Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices and broader price pressures,” the FOMC statement noted. “The committee is strongly committed to returning inflation to its 2% objective.”
The stronger monetary tightening was accompanied by a downgrade to the Fed’s economic outlook, with GDP now seen slowing to 1.7% growth this year, down from 2.8% previously. No Fed policymaker projected an outright recession, but the low end of the range of GDP forecasts is now 0.8% in 2023 (was 2.0%) and 1.0% in 2024 (was 1.0%).
“The Fed is willing to let the unemployment rate rise and risk a recession as collateral damage to get inflation back down. This isn’t a Volcker moment for Powell given the magnitude of the hike, but he is like a Mini-Me version of Volcker with this move,” Brian Jacobsen, senior investment strategist at Allspring Global Investments, told Reuters.
Powell said, “We are not trying to induce a recession now, let’s be clear about that. We are trying to achieve 2% inflation consistent with a strong labor market.” But he acknowledged there is always a risk policymakers could go too far, too fast and squelch economic growth.