WASHINGTON—The Federal Reserve approved its third consecutive interest-rate rise of 0.75 percentage point and signaled additional large increases were likely even though they are raising the risk of recession.
Fed officials voted unanimously to lift their benchmark federal-funds rate to a range between 3% and 3.25%, a level last seen in early 2008. Nearly all of them expect to raise rates to between 4% and 4.5% by the end of this year, according to new projections released Wednesday, which would call for sizable rate increases at policy meetings in November and December.
“We have got to get inflation behind us. I wish there were a painless way to do that. There isn’t,” Fed Chairman Jerome Powell said at a news conference after the rate decision.
Stock markets tumbled after a volatile trading day. The broad S&P 500 index fell 66 points, or 1.7%, to 3789.93. The yield on the two-year U.S. Treasury note settled around 3.993%, according to Tradeweb, from 3.962% Tuesday, nearly a 15-year high. Just after the Fed’s announcement, it had touched as high as 4.12%. Meanwhile, yields on longer-term Treasurys fell, since higher rates could lead to a sharper economic downturn.
Officials projected that rate rises will continue into 2023, with most expecting the fed-funds rate to rest around 4.6% by the end of next year. That was up from 3.8% in their projections this past June.
Analysts said they hadn’t expected the Fed to show quite so high an endpoint for the rate. Given how persistently elevated inflation has been, “I wouldn’t be surprised to see them go even higher than what they’ve written down—say, to 5%,” said Ellen Meade, an economist at Duke University who is a former senior adviser at the Fed.
The projections showed considerable divergence over what might happen after next year. Around one third of officials expect to hold the fed-funds rate above 4% through 2024, while others anticipate more rate cuts.
“There is a message here that rates will stay higher for longer, and this message is really sticking with market participants,” said Blerina Uruci, U.S. economist at T. Rowe Price.
Even though the economy isn’t yet showing the full effects of Fed rate increases, “all of this volatility and uncertainty makes it hard for businesses to make plans. There are some benefits to having this hiking of interest rates over and done with sooner,” she said.
One year ago, the Fed was signaling rates might stay near zero for another year, and it was purchasing Treasury and mortgage securities to provide additional stimulus. Officials misjudged the strength of the economy’s rebound from the pandemic and how high inflation would rise.
They are now raising rates at the most rapid pace since the 1980s and have approved increases at five consecutive policy meetings, starting in March when they lifted the fed-funds rate from near zero. Until June, the Fed hadn’t raised rates by 0.75 point since 1994.
Officials made a second such increase in July but signaled more concerns about overdoing rate rises, which, together with investor optimism about how quickly inflation might decline, fueled a market rally.
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