The Federal Reserve on Wednesday demonstrated it wanted to be aggressive in its fight against inflation, approving its largest rate hike in almost three decades and signaling that its benchmark rate will rise close to 4% by the end of next year.
At the central bank’s meeting that ended Wednesday, officials said they would hike the federal-funds target rate by three-quarters of a percentage point to between 1.5% and 1.75%.
In its “dot-plot forecast,” the Fed said it planned to raise its benchmark interest rate to a mid-range of 3.4% by the end of this year and to 3.8% by the end of 2023. Fed officials anticipate being able to cut rates slightly in 2024.
There was only one dissent. Kansas City Fed President Esther George preferred a half-point hike.
In its policy statement, the Fed said it is strongly committed to getting inflation down to 2%. The central bank said overall economic activity has picked up from the weak first quarter.
The Fed said it would adjust its interest-rate policy if risks emerge that would “impede” the Fed from its goals.
The Fed’s aggressive tone comes as Fed Chairman Jerome Powell was sworn last month to a second four-year term. President Joe Biden met with Powell in the Oval Office earlier this month and the Biden White House has urged the Fed to combat inflation.
In a further sign of hawkishness, five of the 18 top Fed officials now expect the funds rate to rise slightly above 4% next year.
Over the last month, the Fed has signaled it wanted to raise rates by a half a percentage point. But the May consumer price data showed that inflation was still running at 40-year high levels.
Many economists are worried the aggressive Fed policy might push the economy into a recession.
In its economic forecasts, the Fed expects the economy to slow to a 1.7% growth rate this year and in 2023. Then the economy will pick up slight to 1.9% in 2024.
The Fed now expects the unemployment rate to rise to 3.7% by the end of this year and up to 4.1% in 2024.
The Fed expects inflation, as measured by the central bank’s favorite personal consumption expenditure index, to end the year at a 5.2% rate and slow to a 2.6% rate by the end of 2023. The PCE price index was running at a 6.3% rate in April.
By the end of 2024, inflation will return to a 2.2% rate, close to the Fed’s target.