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Federal Reserve sees rates rising higher than its previous forecast

Federal Reserve Chair Jerome Powell said, “We will stay the course until the job is done.”Jacquelyn Martin/Associated Press

WASHINGTON — Federal Reserve officials eased up on their aggressive interest rate hikes on Wednesday, but indicated the battle against inflation is far from over as the foe is proving tougher than they anticipated just a few months ago.

While the Fed will boost rates in smaller increments, it will ultimately push them higher — above 5 percent― than it had forecast in September. That could push the economy into a recession.

The central bank’s monetary policy-making committee unanimously bumped its benchmark interest rate by half a percentage point, the smallest increase since May. The rate now stands at a range between 4.25 percent and 4.5 percent, the highest since 2007. And Fed officials projected the rate will peak at 5.1 percent next year and remain over 4 percent into 2025.


Despite what he called a “welcome reduction” in price growth in recent government data, Fed Chair Jerome Powell said it will take “substantially more” evidence to convince him and his colleagues that inflation definitely is headed lower.

“We will stay the course until the job is done,” he said at a news conference. “It’s good to see progress, but let’s just understand we have a long ways to go to get back to price stability.”

Powell dumped cold water on hopes that recent indications inflation has peaked would lead the Fed to not only slow down the pace of rate hikes but end them sooner. Major stock market indexes fell after the rate hike announcement.

Massachusetts Senator Elizabeth Warren and other progressive members of Congress have been publicly urging Powell to ease up significantly on rate hikes out of concerns they will slow the economy so much that millions of people will lose their jobs. But Powell reiterated Wednesday that high inflation would be more damaging to average Americans and it needs to be reined in.


“I wish there were a completely painless way to restore price stability,” he said. “There isn’t and this is the best we can do.”

A shopper at Gerrity's Supermarket in Scranton, Pennsylvania on Feb. 24, 2022. Hannah Beier/Bloomberg

The Fed has been criticized for not responding quicker as prices began rapidly rising in the spring of 2021. Powell said at the time that the increased inflation was a temporary reaction to the economy reopening after the worst of the pandemic. But inflation has proven to be much more persistent as pandemic-related supply chain problems have lingered and government rescue funding provided consumers with more money to spend and help drive up prices.

Now, the Fed is trying to compensate for that slow reaction by forecasting it will be aggressive in raising interest rates to completely wring inflation out of the economy, said Boston College economist Brian Bethune.

“It’s like putting a screw into the wall and you realize you overtightened, but you may do that deliberately realizing you’re going to back it off a couple rotations,” he said. “They have to, in some sense, overcompensate for the mistake they made earlier.”

Powell said the fight against inflation is entering a new phase now that its aggressive actions this year — raising the rate a whopping 4.25 percentage points— put interest rates at a level where they are restricting economic activity and can really start pushing down inflation.

“It’s now not so important how fast we go,” he said of the rate hikes. “It’s far more important to think what is the ultimate level and then, at a certain point, the question will become how long do we remain restrictive.”


Mark Zandi, chief economist at Moody’s Analytics, an economics research and consulting firm, said interest rates are high enough that the Fed can move more cautiously.

“Rates are now a definite headwind to the economy,” he said, noting the recent cooling in inflation and job growth. “Everything now is arguing for them to be less aggressive in their rate hikes.”

A half percentage-point interest rate increase is a step down from the Fed’s past four hikes of three-quarters of a point. But it’s still historically large. Until this year, the Fed had only raised rates by half a percentage point or more five times since 1990, and hadn’t done it at all since 2000. Large interest rate changes usually are more common when the Fed is reducing rates quickly to stimulate a cratering economy.

The Marriner S. Eccles Federal Reserve building in Washington, DC. Samuel Corum/Photographer: Samuel Corum/Bloom

Despite the signs inflation is coming down from its midyear peak, Fed officials increased their estimates of how high interest rates will go next year. The median forecast was for the rate to be about 5.1 percent at the end of 2023, up from 4.6 percent in their last forecast in September.

The rate projections came because Fed officials also forecast that inflation will be higher next year than they had expected in September and the nation’s economic growth will slow to the edge of a recession.

The Fed’s preferred inflation barometer, the government’s personal consumption expenditures price index, generally runs lower than the more frequently cited consumer price index. The PCE price index was 6 percent for the 12 months that ended in October, the most recent data available. That was down from the four-decade high of 7 percent in June and mirrors a similar drop in the consumer price index.


Fed officials now project the PCE price index will be 3.1 percent at the end of 2023, up from their September forecast of 2.8 percent. That is above the Fed’s target of 2 percent annual inflation.

The impact of those higher rates showed up in the economic projections. Fed officials sharply downgraded their forecast for economic growth last year to an anemic 0.5 percent from 1.2 percent in September. They also projected the unemployment rate would hit 4.6 percent at the end of next year, up from the historically low 3.7 percent level the government reported in November.

The projections have the US economy barely growing. Many economists are forecasting a mild recession next year because of the Fed’s interest rate hikes. But Powell said the Fed doesn’t think that will happen despite the interest rate increases.

Zandi put the odds of a recession at 50 percent, although he said recent inflation data makes him more optimistic the nation will avoid one.

“I think it’s fair to say with a high degree of confidence that it’s going to be an uncomfortable year. . . . It’s going to be a struggle for the economy,” he said. “Whether that’s recession or not is difficult to gauge. It’s really on the knife’s edge.”


Jim Puzzanghera can be reached at Follow him @JimPuzzanghera.