Federal Reserve Chairman Jerome Powell said Wednesday that the central bank hopes to avoid a recession after ratcheting up its pace of interest rate hikes.
“We’re not trying to induce a recession now, let’s be clear about that,” Powell told reporters after the policy-setting Federal Open Market Committee raised short term rates by 0.75%.
Wednesday's move marked the Fed's largest in a single meeting since 1994. Short-term borrowing costs are now in a target range between 1.50% and 1.75%.
Powell said the Fed’s goal is to depress the rapid pace of inflation closer to its 2% target, all while preserving a “strong” labor market. Forecasts released by the Fed showed confidence in the central bank’s ability to hit both marks, although economists say the task will be tough.
Projections from the Fed published Wednesday showed the median official expects interest rates will rise to 3.4% by year-end, well above the 2.5% level that many Fed officials have described as “restrictive” for economic activity.
“[G]oing faster and deeper into restrictive territory implies a greater risk of a hard landing,” ING Economics wrote Wednesday afternoon.
A “hard landing” outcome would be the opposite of forecasts from the Fed, and may look like a sharp spike in unemployment as the rapid pace of rate hikes halts economic activity.
“There’s a pathway here. It is not going to be easy,” Powell said Wednesday. He added that inflation remains the priority, noting that “clearly, people do not like inflation.”
The median policymaker projected the U.S. economy would experience a still-elevated 5.2% rate of inflation at the end of 2022, but expects that to slow down to 2.6% in 2023. Through the end of 2023, the median projection shows the unemployment rate rising a few tenths of a percentage point — to 3.9%.
For comparison, the most recent read on the Fed’s preferred measure of inflation — personal consumption expenditures (PCE) — showed prices rising by 6.3% on a year-over-year basis in April. The May jobs report showed the unemployment rate at a relatively low 3.6%.
The Fed’s forecasts reflect the central bank’s faith in the effectiveness of a more aggressive rate hike path. After an abrupt pivot to a larger rate hike this week — which tabled previously-communicated plans for a 0.50% move — the Fed now projects further rate increases through the rest of this year.
50? 75? 100?
The Fed's outsized move Wednesday raised some alarm over whether the central bank is now at greater risk of raising rates at a pace that would tip the economy into recession. And this move prompted questions about whether a 0.75% interest rate increase clears a path for even larger moves in the months ahead.
But Powell suggested the Fed does not currently intend on further accelerating the pace of its rate hikes — at least for its next scheduled policy-setting meeting set for July 26-27.
“The next meeting could well be about a decision between 50 and 75 [basis points],” Powell said Wednesday, essentially downplaying any speculation over a 100 basis point move.
However, Powell reminded markets that the central bank retains flexibility on its rate moves — which he said justified the Fed’s sudden decision to abandon plans for a 0.50% move this week.
“Our policy is adaptive and it will continue to do so,” Powell said.
Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.