Fed Hikes Most Since 1994

Brian Cheung |

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The Federal Reserve raised interest rates by 0.75%, the largest move it has made in a single meeting since 1994. The central bank messaged that further interest rate hikes will come this year, as the Fed leans on higher borrowing costs to dampen demand and work to slow faster-than-expected inflation. The Fed decision lifts short-term borrowing costs to a target range between 1.50% and 1.75%. In economic projections released Wednesday, the median Fed policymaker expects to further raise interest rates to roughly 3.4% by the end of the year. That would suggest another 1.75% in total rate hikes, spread across the remaining four scheduled policy-setting meetings this year. The urgency to move faster coincided with Fed policymakers’ expectations that inflation will not abate as fast as they had expected in their March projections. The median Fed policymaker now expects prices to rise by 5.2%, as measured by personal consumption expenditures (PCE), over the course of 2022, a faster pace than the 4.3% it had forecast in March. The central bank also downgraded expectations on other key economic measures, expecting the U.S. economy to grow by only 1.7% this year, compared to the 2.8% it had forecast in March. Fed officials also suggested they could see unemployment rise this year, with the median member now forecasting a 3.7% headline unemployment rate by the end of the year (which would be a notch up from the 3.6% recorded in May). A hot inflation report on Friday, showing the fastest pace of price increases since 1981, showed little sign of alleviating price pressures in the month of May. Combined with other economic data showing the worst reading of consumer confidence since the 1970s, the pessimistic outlook pushed the Fed to raise rates by 0.75%. Although the central bankers raised their expectations on inflation for 2022, the median member of the committee expects to see the pace of headline price increases to cool to 2.6% next year. These forecasts suggest inflation could cool further in 2024 to 2.2%, much closer to the Fed’s 2% target. The next FOMC meeting will take place the last week of July.