WASHINGTON (AP) 鈥� Intensifying its fight against high inflation, the Federal Reserve raised its key interest rate Wednesday by a substantial three-quarters of a point for a third straight time and signaled more large rate hikes to come 鈥� an aggressive pace that will heighten the risk of an eventual recession.
The Fed鈥檚 move boosted its benchmark short-term rate, which affects , to a range of 3% to 3.25%, the highest level since early 2008.
The officials also forecast that they will further raise their benchmark rate to roughly 4.4% by year's end, a full point higher than they had envisioned as recently as June. And they expect to raise the rate again next year, to about 4.6%. That would be the highest level since 2007.
By raising borrowing rates, the Fed makes it costlier to take out a mortgage or an auto or business loan. Consumers and businesses then presumably borrow and spend less, cooling the economy and slowing inflation.
Falling gas prices have slightly lowered headline inflation, which was a still-painful 8.3% in August compared with a year earlier. Those declining prices at the gas pump might have contributed to , which Democrats hope will boost their prospects in the November midterm elections.
Speaking at a news conference, Chair Jerome Powell said that before Fed officials would consider halting their rate hikes, they would 鈥渨ant to be very confident that inflation is moving back down鈥� to their 2% target. He noted that the strength of the job market is fueling pay gains that are helping drive up inflation.
And he stressed his belief that curbing inflation is vital to ensuring the long-term health of the job market.
鈥淚f we want to light the way to another period of a very strong labor market," Powell said, "we have got to get inflation behind us. I wish there was painless way to do that. There isn鈥檛.鈥�
Fed officials have said they are seeking a 鈥渟oft landing,鈥� by which they would manage to slow growth enough to tame inflation but not so much as to trigger a recession. Yet most economists are skeptical. They say they think the Fed鈥檚 steep rate hikes will lead, over time, to job cuts, rising unemployment and a full-blown recession late this year or early next year.
鈥淣o one knows whether this process will lead to a recession, or if so, how significant that recession would be," Powell said at his news conference. "That鈥檚 going to depend on how quickly we bring down inflation.鈥�
In their updated economic forecasts, the Fed's policymakers project that economic growth will remain weak for the next few years, with rising unemployment. They expect 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 unemployment has risen by a half-point over several months, a recession has always followed.
Fed officials now foresee the economy expanding just 0.2% this year, sharply lower than their forecast of 1.7% growth just three months ago. And they envision sluggish growth below 2% from 2023 through 2025.
Even with the steep rate hikes the Fed foresees, it still expects core inflation 鈥� which excludes the volatile food and gas categories 鈥� to be 3.1% at the end of next year, well above its 2% target.
Powell acknowledged in a speech last month that to households and businesses. And he added that the central bank鈥檚 commitment to bringing inflation back down to its 2% target was 鈥渦nconditional.鈥�
Short-term rates at a level the Fed is now envisioning would make a recession likelier next year by sharply raising the costs of mortgages, car loans and business loans. Last week, the average fixed mortgage rate topped 6%, its highest point in 14 years, which helps explain why . Credit card borrowing costs have reached their highest level since 1996, according to Bankrate.com.
Inflation now appears increasingly fueled by higher wages and by consumers鈥� steady desire to spend and less by the supply shortages that had bedeviled the economy during the pandemic recession. On Sunday, that he believed a soft landing for the economy was still possible, suggesting that his administration鈥檚 recent energy and health care legislation would lower prices for pharmaceuticals and health care.
The law may help lower prescription drug prices, but . Last month, the nonpartisan Congressional Budget Office judged it would have a 鈥渘egligible鈥� effect on prices through 2023. The University of Pennsylvania鈥檚 Penn Wharton Budget Model went even further to say 鈥渢he impact on inflation is statistically indistinguishable from zero鈥� over the next decade.
Even so, some economists are beginning to express concern that the Fed鈥檚 rapid rate hikes 鈥� the fastest since the early 1980s 鈥� 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 鈥� a key driver of inflation 鈥� are levelling off and by some measures even declining a bit.
Surveys also show that Americans are expecting inflation to ease significantly over the next five years. That is an important trend because inflation expectations can become self-fulfilling: If people expect inflation to ease, some will feel less pressure to accelerate their purchases. Less spending would then help moderate price increases.
The Fed鈥檚 rapid rate hikes mirror steps that other major central banks are taking, contributing to concerns about a potential global recession. The European Central Bank last week raised its benchmark rate by three-quarters of a percentage point. The Bank of England, the Reserve Bank of Australia and the Bank of sa国际传媒 have all carried out hefty rate increases in recent weeks.
And in China, the world鈥檚 second-largest economy, growth is already suffering from the government鈥檚 repeated COVID lockdowns. If recession sweeps through most large economies, that could derail the U.S. economy, too.
Even at the Fed鈥檚 accelerated pace of rate hikes, some economists 鈥� and some Fed officials 鈥� argue that they have yet to raise rates to a level that would actually restrict borrowing and spending and slow growth.
Many economists sound convinced that widespread layoffs will be necessary to slow rising prices. Research published earlier this month under the auspices of the Brookings Institution concluded that unemployment might have to go as high as 7.5% to get inflation back to the Fed鈥檚 2% target.
鈥淭he risk is that the Fed acts more aggressively in its mission to return inflation back to its 2% objective, pushing the funds rate higher than previously expected and keeping it higher for longer,鈥欌�� Nancy Vanden Houten, lead U.S. economist at Oxford Economics, said Wednesday after the Fed's meeting.
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AP Economics Writer Paul Wiseman contributed to this report.
Christopher Rugaber, The Associated Press
