The Federal Reserve took another aggressive step in its campaign to cut inflation on Wednesday, raising its target interest rate by three-quarters of a percentage point, the biggest rate hike since 1994.
Driving the news: In addition to raising their short-term interest rate target to a range between 1.5% and 1.75%, Fed officials forecast their target rate to hit 3.4% by the end of the month. this year, well above the 1.9% they envisioned in March.
Why is this important: The Fed has shifted to an emergency stance on inflation, but such steep rate hikes risk sending the economy into recession and markets plunging further.
- For weeks, Fed officials had signaled they would likely only raise rates by half a percent at this meeting, a plan undone by a wave of poor inflation data in recent days.
- Between last Thursday’s close and Tuesday’s close, the S&P 500 fell 7% and the average rate for a 30-year fixed-rate mortgage rose nearly three-quarters of a percentage point as markets began to adjust to the possibility of an aggressive Fed move.
What they say : “Inflation remains elevated, reflecting pandemic-related supply and demand imbalances, rising energy prices and broader price pressures,” the policy committee said in a statement.
- The committee “expects that continued increases” in rates will be appropriate. Members’ forecasts imply that it will raise rates by around another 1.75 percentage points over the rest of the year.
By the numbers: Fed officials also released projections of how they expect the economy to develop in the coming months, and they now expect both slower growth and higher inflation. higher than just three months ago – a more stagflationary mix of conditions.
- The median leader of the Fed now expects inflation to be 5.2% this year, down from 4.3% projected in March.
- The median official expected GDP growth of 1.7%, down from a forecast of 2.8% in March.
decision was not unanimous. Esther George, president of the Federal Reserve Bank of Kansas City, preferred to raise rates only half a percentage point.
And after: Fed Chairman Jerome Powell will take questions from the media at 2:30 p.m. ET.