Fed Raises Rates 0.25%, Sees Cuts Next Year

Federal Reserve policymakers raised the fed funds rate by 25 basis points Wednesday and believe beating back inflation may require just one more interest-rate hike this year but less easing next year than most thought would be appropriate just three months ago.

U.S. central bankers see the policy rate, now in the 4.75%-5.00% range after Wednesday’s 25-basis-point increase, at 5.1% by year end, according to the median estimate in the Fed’s latest quarterly summary of economic projections.

That’s the same as the median projection in December, before a slew of stronger-than-expected readings on growth and inflation, but also before recent turmoil in the banking sector that policymakers expect will weigh on economic growth.

Forecasts from the 18 policymakers were varied, however, with seven policymakers seeing a higher appropriate stopping point for rates. One policymaker thought no further rate hikes would be needed.

The benchmark rate is seen ending next year at 4.3%, based on the median projection. Views again varied widely, with four policymakers expecting rates to be 5.1%% or higher and four expecting rates to end the year below 4%.

In December Fed policymakers thought 2023 would end with the Fed policy rate at 5.1%, before dropping to 4.1% in 2024.

Policymakers meanwhile saw inflation by the Fed’s preferred measure falling to 3.3% in the final quarter of this year, slower progress toward the Fed’s 2% goal than expected in December.

The personal consumption expenditures price index, the yardstick by which the Fed measures that progress, rose 5.4% in January from a year earlier.

Policymakers expect their interest-rate hikes to push the unemployment rate, now at 3.6%, to 4.5% in the last quarter of 2023, and to 4.6% in 2024. Three months ago, the jobless rate was seen rising to 4.6% this year.

By one measure, known as the Sahm Rule for former Fed staffer Claudia Sahm, an increase of that magnitude in the unemployment rate likely signals a recession.]

Wednesday’s projections show Fed policymakers have become slightly more pessimistic about the outlook for the economy, with a median projection for GDP growth this year of 0.4%, versus December’s expectation for 0.5%. For 2024 they reduced their growth expectation to 1.2% from 1.6%.