(CNN) –– The United States Federal Reserve made history again this Wednesday by approving a 0.75 percentage point increase for the third time in a row, in its battle to curb unbridled inflation battering the economy, while hurting consumers and suffocating the administration of President Joe Biden.
The sizeable increase, which seemed inconceivable to markets just a few months ago, brings the central bank’s benchmark interest rate to a new target range of 3%-3.25%. This figure represents the highest fed funds rate since the global financial crisis in 2008.
The Fed’s decision represents the central bank’s toughest policy in its fight against inflation since the 1980s, another period of skyrocketing prices.
This decision is likely to cause economic hardship for millions of American businesses and households by increasing the cost of home, auto, and other credit.
Federal Reserve Chairman Jerome Powell has acknowledged the economic pain this fast-tightening regime can cause.
“We’ve got to keep it up until we’re done,” Powell said in August at a central bankers’ forum in Jackson Hole, Wyoming. “While higher interest rates, slower growth and weaker labor market conditions will reduce inflation, they will also bring some problems to households and businesses. These are the unfortunate costs of reducing inflation. But not restoring price stability would do much more damage,” he warned.
The Fed’s updated summary of economic projections, released Wednesday, reflects that damage: The quarterly report showed a less optimistic outlook for economic growth and the labor market, with the average unemployment rate inching to 4.4% in 2023, higher than the 3.9% Federal Reserve officials projected in June and substantially higher than the current rate of 3.7%.
US gross domestic product, the main measure of economic output, was revised down 0.2% for June after an initial 1.7% figure. That’s well below analyst estimates: Bank of America economists had calculated that GDP would be revised to 0.7%.
Inflation projections also grew. Core personal consumption expenditures, the Fed’s favorite measure of price gouging, are projected to hit 4.5% this year and 3.1% in 2023, the Fed’s summary of projections showed. A figure higher than the June projections of 4.3% and 2.7%, respectively.
Perhaps most important to investors seeking forward guidance from the Fed is the fed funds rate projection, which details what officials believe is the right path for future rate increases. Figures released on Wednesday showed the Federal Reserve expects interest rates to remain elevated for years to come.
The median fed funds rate projection was revised up for 2022 to 4.4% from an initial 3.4% in June. That number rises to 4.6% from 3.8% for 2023. The rate was also revised up for 2024 to 3.9% from 3.4% in June and is expected to remain elevated in the 2, 9% in 2025.
Overall, the new projections show the growing risk of monetary policy tightening to the point of triggering a recession.
They also provide some evidence that the Fed is willing to accept “damage” in economic conditions to reduce persistent inflation.
The higher prices mean consumers are now spending about $460 more on groceries each month than they did at the same time last year, according to Moody’s Analytics. Still, the labor market remains strong, as does consumer spending. House prices remain high in many areas, even though there has been a substantial increase in mortgage rates. That means the Fed may feel the economy can accept more aggressive rate hikes.