The Federal Reserve approved its largest interest rate hike in more than a quarter-century on Wednesday to stem a surge in inflation that U.S. central bank officials acknowledged may be eroding public trust in their power and is being driven by events that appear to be increasingly beyond their control. The Fed’s hawkish commitment to controlling inflation has already triggered a broad tightening of credit conditions, which is being felt in the US housing and stock markets, and is likely to slow demand throughout the economy – as the Fed intends. 

The move raised the target federal funds rate by three-quarters of a percentage point to a range of 1.5 percent to 1.75 percent, which is still low by historical standards.

Officials also anticipate steady rate increases through the rest of the year, possibly including additional 75-basis-point increases, with a federal funds rate of 3.4 percent at the end of the year. That would be the highest level since January 2008, and enough, according to Fed projections, to significantly slow the economy in the coming months and lead to an increase in unemployment. 

Nonetheless, the Fed chairman’s remarks were among his most sobering yet about the challenge he and his colleagues face in lowering inflation from its current 40-year high to a level closer to its 2 percent target without causing a sharp slowdown in economic growth or a sharp increase in unemployment.

“Our real goal is to keep inflation under 2% while the labour market remains strong… What is becoming clear is that many factors beyond our control will play a significant role in determining whether that is possible or not “Powell cited the Ukraine conflict and global supply concerns. 

So far, the rate hikes announced last month and in March have not only failed to slow inflation, but have allowed it to accelerate to a level that recent data suggests has begun to influence public attitudes in a way that could make the Fed’s job even more difficult.

Monetary policy tightening was accompanied by a downgrade in the Fed’s economic outlook, with the economy now expected to slow to a below-trend 1.7 percent rate of growth this year, unemployment rising to 3.7 percent by the end of the year, and continuing to rise to 4.1 percent through 2024. 

While no Fed policymaker predicted an outright recession, the range of economic growth forecasts dipped toward zero in 2023, with an index of Fed opinion showing officials almost unanimously believing the risks were for slower growth, higher inflation, and higher unemployment.

Consumer inflation expectations rose sharply in June, according to a survey released on Friday, a result Powell called “quite eye-catching” and enough to sway policymakers toward a larger 75-basis-point hike in the hopes of making faster progress on inflation and retaining public trust that price increases will slow. 

The faster pace of rate hikes outlined by officials on Wednesday more closely aligns monetary policy with the rapid shift in financial market views of what it will take to bring price pressures under control that occurred this week. 

Bond yields fell on Wednesday following the release of Fed projections showing economic growth slowing to a below-trend rate of 1.7 percent and policymakers expecting to cut interest rates in 2024.

Wall Street stocks finished the day higher. 

Interest rate futures markets also indicated that the Fed is likely to raise rates by 75 basis points at its next policy meeting in July. 

Given the unexpected increase in the monthly inflation report on Friday, as well as the increase in expectations, “75 basis points seemed like the right thing to do at this meeting, and that’s what we did,” he said. 

However, he stated that such rate increases were unlikely to be “common,” and that when Fed policymakers meet in July, an increase of half a percentage point or three-quarters of a percentage point would be “most likely.”

Many analysts, who were critical of the Fed’s March projections that saw inflation easing with modest rate hikes and no increase in the unemployment rate, said the new forecast was more realistic. 

Even with the more aggressive interest rate cuts announced on Wednesday, policymakers expect inflation to be 5.2 percent this year and 2.2 percent in 2024, as measured by the personal consumption expenditures price index. 

Inflation has become the Fed’s most pressing economic issue, and it has begun to shape the political landscape as well, with household sentiment deteriorating as food and gasoline prices rise.

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