The Federal Reserve conducted a massive interest rate hike in its effort to curb inflation, the latest and most dramatic measure of a campaign that has raised the risk of recession.
Following a two-day meeting of the Federal Open Market Committee in Washington, the central bank announced that it would hike its interest rate target by three-quarters of a percentage point, or 75 basis points. The move marks the fourth consecutive rate hike of that scale, a historically aggressive course of action that illustrates the Fed’s resolve to drive down inflation.
“We are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2%,” said Fed Chairman Jerome Powell during a Wednesday press conference. “In addition, we’re continuing the process of significantly reducing the size of our balance sheet. Restoring price stability will likely require maintaining a restrictive stance of policy for some time.”
In a statement, though, Fed officials added language hinting that future increases might not be as large as the past four hikes. It also emphasized the central bank’s commitment to pushing inflation back down to around 2%.
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The Fed’s interest rate target has risen by 3% in the past six months, the most forceful rate hikes since the Great Inflation of the late 1970s and early 1980s. The target is now 3.75% to 4%, the highest it has been since the financial crisis in 2008.
The latest 75-basis-point hike comes on the tail of a consumer price index report that found inflation ticked down to 8.2% for the 12 months ending in September — a number that is higher than economists had expected and much higher than the Fed had hoped.
Wednesday’s rate increase was in line with expectations, with the markets already pricing in another hike of this magnitude. Some economists, though, indicated there was a possibility that the Fed would soften its resolve a bit and conduct a 50-basis-point increase because of growing fears that the central bank’s increasingly aggressive monetary policy could knock the economy into a recession.
In the run-up to this week’s monetary policy committee meeting, congressional Democrats put pressure on Powell to be less aggressive with the Fed’s rate hikes. They said that the tightening could threaten the economy and labor market.
The massive rate hike is another bit of bad news for President Joe Biden and Democrats just days before the midterm elections. The 75-basis-point increase is an indication that the inflation situation is still terrible and raises the odds that the economy will fall into a recession — all talking points that Republicans will undoubtedly use to bash the country’s Democratic leadership heading into next week.
The midterm elections, which will decide whether Democrats can retain both chambers of Congress, have increasingly come down to economics. Several polls have shown that the topic is the one that concerns most voters, more so even than wedge issues like abortion that have grabbed headlines this year.
A recent poll by the Wall Street Journal found that nearly half of voters said they think congressional Republicans are best suited to help cool inflation, compared to only 27% who said the same about Democrats.
Throughout the course of the year, the Fed has continued to raise its projections for just how hot and how long inflation will persist — making investors and Fed watchers even more nervous about the country’s economic situation.
Following the September monetary policy committee meeting, Fed officials increased their projections for inflation. The median Fed official now sees inflation at 5.4% by the end of the year, compared to a June projection of 5.2%. Inflation projections were slightly more elevated than in June for both 2023 and 2024.
As inflation expectations and interest rate hikes have continued to grow, the risk of a recession that could force hundreds of thousands of people out of work has also risen. The first two quarters of this year featured negative gross domestic product growth, a rule of thumb that typically indicates a recession, although the strong labor market and ultra-low unemployment have kept the economy afloat. GDP also rebounded in the third quarter, another positive sign.
Still, economic forecasters, including the Fed itself, foresee the employment landscape as getting worse over the coming months as the higher interest rates start to take a toll on the economy.
The central bank now predicts the unemployment rate will tick up to 3.8% by the end of the year and 4.4% next year and into 2024, an acknowledgment of the effects its aggressive tightening will have on the economy.
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Many economists now argue that there is a better chance of the economy falling into recession than avoiding a downturn.
There is now a 100% chance of a recession in the U.S. by October of next year, according to recent economic modeling by Bloomberg. That is up from 65% for the same period of time in the previous iteration of the model.
