The Federal Reserve on Wednesday raised its benchmark interest rate by 0.5 percentage point and signals more tightening next year.
The half-point increase brings the Fed’s federal funds rate up to a range of 4.25%-4.5%, the highest since 2007, The central bank has raised rates from near-zero in March to try to dampen inflationary pressures in the wake of the pandemic.
In new projections about future policy, Fed officials penciled in 5.25% as the top end for its benchmark rate. That’s higher than their forecast of 4.75% in September. Seven Fed officials expect rates to go even higher, with two seeing rates topping out at 5.75%. One hawkish official sees rates staying at that level through 2025.
In its statement, the Fed said “ongoing increases would be appropriate.” That signals the Fed thinks they are still several months away from pausing. Officials said recent data point to “modest growth” in spending.
Traders in the federal funds futures market expect the Fed to slow down the pace of tightening again in February to a quarter-point hike. They expect an additional quarter-point hike in March, for a top-end terminal rate of 5%.
Former New York Fed President William Dudley said that markets have been focusing on an optimistic inflation scenario all year. He sees rates rising somewhere in the 5%-6% range.
The median forecast of Fed officials is for tepid growth at an 0.5% annual rate in 2023. That’s down from the prior forecast of 1.2% growth rate. Some Fed officials expect the economy to contract next year. Their forecasts see a slightly stronger growth rate returning in 2024.
Officials project the unemployment rate will rise to 4.6% in 2023 from 3.7% in November. That is not as high as the rate that many economists expect will be needed to bring inflation down.
Fed officials project steady declines in inflation, starting with a drop to 3.1% in 2023 and then moving lower to 2.1% by 2025.
Fed officials see 100 basis points of cuts in 2024 and 100 more in 2025. Financial markets are expecting a rate cut next September.