Fed steps up campaign against inflation with 0.75 point rate hike

The Federal Reserve made an aggressive new move in its campaign to bring down inflation Wednesday, raising its target interest rate by three-quarters of a percentage point, the steepest rate hike since 1994 — and indicated another similar move could be coming next month.

Driving the news: In addition to increasing their target for short-term interest rates to a range of between 1.5% and 1.75% Fed officials projected that their target rate will reach 3.4% late this year, far higher than the 1.9% they envisioned in March.

• Speaking to reporters, Fed chair Jerome Powell said the central bank will likely raise interest rates again by a similar magnitude — or perhaps by a half-percentage point — at its next policy meeting in July.
• "Inflation has obviously surprised to the upside over the past year, and further surprises could be in store," Powell said.

Why it matters: The Fed has shifted toward a break-the-glass, emergency footing on inflation — but such abrupt rate hikes risk sending the economy into recession and markets plunging further.

• For weeks, Fed officials had signaled that they would likely raise rates only half a percent at this meeting, a plan undone by a flurry of bad inflation data in recent days.
• Between last Thursday’s close and Tuesday’s close, the S&P 500 fell 7% and the average rate on a 30 year-fixed rate mortgage rose nearly three-quarters of a percentage point as markets started to adjust for the possibility of the Fed's aggressive move.

What they're saying: “Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures,” the policy committee said in a statement.

• The committee “anticipates that ongoing increases” in rates will be appropriate. The members’ forecasts imply that it will raise rates by about another 1.75 percentage points over the remainder of the year.
• The decision to raise interest rates by three-quarters of a percentage point was not unanimous. Esther George, president of the Federal Reserve Bank of Kansas City, preferred to raise rates only by half a percentage point.

The big picture: Fed officials also released projections for how they expect the economy to evolve in the coming months, and they now expect both slower growth and higher inflation than they did just three months ago – a more stagflationary mix of conditions.

• They also expect to inflict some pain on the labor market with the unemployment rate expected to rise steadily through 2024 to 4.1%.

What they're saying: "Our objective really is to bring inflation down to 2% while the labor market remains strong. What's becoming more clear is that that many factors that we don't control are going to play a very significant role in in deciding whether that's possible or not," Powell said, referring to commodity prices, Russia's invasion of Ukraine and supply chain shortages.

• The median Fed leader now expects inflation of 5.2% this year, up from 4.3% projected in March.
• The median official expected GDP growth of 1.7%, down from a 2.8% forecast in March.
• The median Fed official expects unemployment to rise to 3.7%, up from its 3.5% projection in March.

The bottom line: The Fed says it won't hold back in its battle against inflation, and won't stop until there's "compelling evidence" prices are falling — even if it comes with the trade-off of a softer economy.

Editor's note: This post has been updated with additional information from Jerome Powell following the rate hike announcement.