Intensifying its fight against chronically high inflation, the Federal Reserve raised its key interest rate by a substantial three-quarters of a point for a third straight time, an aggressive pace that is heightening the risk of an eventual recession.
The officials also forecast that they will further raise their benchmark rate to roughly 4.4% by year's end, a full percentage point higher than they had forecast as recently as June. And they expect to raise the rate further next year, to about 4.6%. That would be the highest level since 2007.
In their updated economic forecasts, the Fed's policymakers project that economic growth will remain weak for the next few years, with rising unemployment. It expects the jobless rate to reach 4.4% by the end of 2023, up from its current level of 3.7%. Historically, economists say, any time the unemployment rate has risen by a half-point over several months, a recession has always followed.Fed officials now see the economy expanding just 0.2% this year, sharply lower than its forecast of 1.
Falling gas prices have slightly lowered headline inflation, which was a still-painful 8.3% in August compared with a year earlier. Declining gas prices might have contributed to a recent rise in President Joe Biden’s public approval ratings, which Democrats hope will boost their prospects in the November midterm elections.
Some economists are beginning to express concern that the Fed’s rapid rate hikes -- the fastest since the early 1980s -- will cause more economic damage than necessary to tame inflation. Mike Konczal, an economist at the Roosevelt Institute, noted that the economy is already slowing and that wage increases – a key driver of inflation -- are levelling off and by some measures even declining a bit.
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