The US Federal Reserve raised their main interest rate by three-quarters of a percentage point. The 75 bps hike in key lending rate is the biggest since 1994. The action raised the short-term federal funds rate to a range of 1.50 percent to 1.75 percent. Federal Reserve officials also signaled they will keep hiking aggressively this year, to restrain the rampant inflation. They projected raising it to 3.4% by year-end, implying another 175 basis points of tightening this year. The central bank, while announcing the rate hike, said it is “strongly committed” to returning inflation to two percent. It projected a slowing down of the country’s economy in the months to come, and a likely increase in the rate of unemployment.
The Fed reiterated it will shrink its massive balance sheet by $47.5 billion a month stepping up to $95 billion in September. Fed signaled it expects less near-term relief from inflation than they did three months ago.
Inflation – as measured by the annual change in the Personal Consumption Expenditures price index – is seen ending the year at 5.2%, up from a March projection of 4.3%. As of April, the PCE index was up 6.3% on a year-over-year basis, just below a 40-year high touched in March.
Growth Projection 1.7 percent
The stricter monetary policy was accompanied with a downgrade to the Fed’s economic outlook, with the economy now seen slowing to a below-trend 1.7 percent rate of growth this year. While no policymaker projected an outright recession, the range of economic growth forecasts edged toward zero in 2023 and the federal funds rate was seen falling in 2024.
U.S. Jobless Rate
Policymakers see the unemployment rate at 3.7% at the end of this year compared with 3.5% in their March forecasts. The U.S. jobless rate was 3.6% in May. Unemployment could rise to 4.1% at the end of 2024 from 3.6%.
