Fed Takes Historic Action to Tame Inflation

A chart indicating rising interest rates

At June’s meeting, the FOMC took historic action to cool inflation, raising the Fed funds rate by 0.75% for the first time since 1994. This dramatic decision comes on the heels of the latest inflation report which showed that consumer prices have continued to escalate despite the Fed’s efforts to tighten monetary policy.

In addition to raising rates, FOMC members updated their projections for economic and monetary policy outlooks. These projections paint a somewhat grimmer picture for business leaders over the coming months. However, with a clear understanding of the current and future interest rate environment, leaders can tailor their decisions to make the most of rising rates.

FOMC Members Vote to Raise Rates

In April, the inflation rate slowed, stoking hopes that previous rate hikes had begun to take effect. However, in May, inflation once again skyrocketed, rising at the fastest pace since December 1981. The latest data showed consumer prices rose by 8.6% in May, renewing fears that inflation would persist despite the Fed’s efforts.

As consumer price increases continued to break multidecade records, FOMC members were forced to take historic action to tame the rampant inflation. This action consisted of raising the Fed funds rate by 0.75% – the largest increase since 1994. The new Fed Funds Target Rate is 1.5%-1.75%.

In addition to raising rates, the Fed will continue to normalize interest rates and fight inflation with their previously announced plan for reducing the size of the balance sheet through a process called quantitative tightening.

FOMC Members Project Slower Growth and Tighter Policy Ahead

FOMC members also submitted new projections for the economic and monetary policy outlook. These projections are released four times per year, and the last projections were in March.

Economic Growth Projections Revised Down

In March, FOMC members predicted a 2.8% increase in real GDP this year. Now, members expect the economy to expand by just 1.7%.

Economic growth was also revised down for coming years. For 2023, members updated their estimate from 2.2% to 1.7% and for 2024 the projected economic growth inched down from 2.0% to 1.9%. Over the long-term, FOMC members kept their prediction of 1.8% annual growth.

Unemployment Expected to Rise

The latest forecast for the unemployment rate was raised from 3.5% in March to 3.7% in June. Since the actual unemployment rate was 3.6% in May, this revision shows that FOMC members expect the unemployment rate to rise in the coming months.

Over the next few years, unemployment is expected to trend upward. For 2023, the rate is expected to rise to 3.9% and for 2024 FOMC members predict that it will reach 4.1%. Over the long-term, unemployment is expected to normalize at 4.0%.

Inflation Forecasts Show Continued Price Elevations

In addition to higher unemployment and slower economic growth, FOMC members raised their projections for inflation. In March, members predicted a PCE inflation rate of 4.3% in 2022, but in the June projections, that estimate was raised to 5.2%.

From their latest projections, it appears that FOMC members anticipate their monetary policy actions will prove fruitful. For 2023, the anticipated inflation rate was reduced from 2.7% to 2.6%. Similarly, for 2024, the projected inflation rate was revised from 2.3% to 2.2%. Over the long-run, inflation is expected to moderate at 2.0%.

Tighter Policy Ahead

One of the most significant changes in the FOMC members’ projections came in their update to the predicted Fed funds rate. In the March projections, the rate was expected to reach 1.9% by the end of 2022. In June, this was raised to 3.4%.

Higher rates are also expected in the coming years. For 2023, the projected Fed funds rate was increased from 2.8% to 3.8%. For 2024, the anticipated rate was raised from 2.8% to 3.4%. Longer run, the Fed funds rate is projected at 2.5%, a slight increase from March’s forecast.

Overall, FOMC projections show slower economic growth, higher inflation, fewer jobs, and rising interest rates over the coming years. While this isn’t the most comforting of news, those businesses that keep a finger on the pulse of monetary policy can be ready to dampen its impacts and take advantage of opportunities that may arise from this changing economic landscape.

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