Intensifying its fight against chronically high inflation, the Federal Reserve raised its key interest rate Wednesday by three-quarters of a point for a third straight time and signaled more sharp rate hikes to come — an aggressive pace that’s heightening the risk of an eventual recession.

Federal Reserve Chairman Jerome Powell said, "We will be looking for compelling evidence that inflation is moving down, consistent with inflation returning to 2 percent. We anticipate that ongoing increases in the target range for the federal funds will be appropriate."

"At some point as the stance of policy tightens, it will be appropriate to slow the pace of increases while we assess how our policy adjustments affect the economy," Powell said.

The Fed’s move boosted its benchmark short-term rate, which affects many consumer and business loans, to a range of 3 percent to 3.25 percent, the highest level since early 2008.

The officials also forecast that they will boost their benchmark rate to roughly 4.4 percent by year’s end, a full percentage point higher than they had forecast in June. And they expect to raise the rate further next year, to about 4.6 percent. That would be the highest level since 2007.

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Rates that high would be well into what the Fed calls “restrictive” territory, meaning they would be intended to sharply slow borrowing and spending, cool hiring and wage growth and defeat high inflation.

The central bank’s action Wednesday followed a government report last week that showed high costs spreading more broadly through the economy, with price spikes for rents and other services worsening even though some previous drivers of inflation, such as gas prices, have eased.

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.

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Fed officials have said they’re seeking a “soft landing,” by which they would manage to slow growth enough to tame inflation but not so much as to trigger a recession.

Yet economists increasingly say they think the Fed’s steep rate hikes will lead, over time, to job cuts, rising unemployment and a full-blown recession late this year or early next year.

Falling gas prices have slightly lowered headline inflation, which was a still-painful 8.3 percent in August compared with a year earlier. Declining gas prices might have contributed to a recent rise in President Joe Biden’s public approval ratings, which Democrats hope will boost their prospects in the November midterm elections.

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.

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The economy hasn’t seen rates as high as the Fed is projecting since before the 2008 financial crisis. Last week, the average fixed mortgage rate topped 6 percent, its highest point in 14 years. Credit card borrowing costs have reached their highest level since 1996, according to Bankrate.com.

First Published:Sept 21, 2022 11:54 PM IST