The Federal Reserve increased its benchmark interest rate by three-quarters of a percent on Wednesday for the third consecutive time as it stepped up its campaign against persistently high inflation.
This aggressive pace is increasing the likelihood that there will eventually be a recession.
The Fed’s action increased the short-term benchmark rate, which impacts many consumer and commercial loans, to the highest level since early 2008, in the 3% to 3.25% range.
The policymakers also anticipated raising their benchmark rate by one percentage point from their June prediction to approximately 4.4% by year’s end. And they anticipate raising the pace, even more the following year to roughly 4.6%.
The level would be the greatest since 2007.
Rates that high would be well into what the Federal Reserve refers to as a “restrictive” area, which means they would be designed to significantly reduce borrowing and spending, moderate wage growth, and combat excessive inflation.
Following a government report last week that showed high costs spreading more widely throughout the economy, the central bank took action on Wednesday.
The report showed that price spikes for rent and other services were getting worse despite the fact that some prior drivers of inflation, like gas prices, had subsided. The Fed increases borrowing costs, making it more expensive to get a mortgage, vehicle, or business loan.
After that, people and businesses would likely borrow less and spend less, limiting inflation and cooling the economy.
Officials from the Fed have stated that they are aiming for a “soft landing,” whereby they can manage to limit GDP just enough to control inflation but not enough to start a recession. However, more and more economists believe that the Fed’s sharp rate increases will eventually result in job losses, growing unemployment, and a full-blown recession late this year or early next year.
In a speech last month, Chair Jerome Powell admitted that the Fed’s actions might “bring some pain” to consumers and companies. The resolve of the central bank to reduce inflation back down to its 2% objective, he continued, was “unconditional.”