Federal Reserve officials slowed their campaign to cool the economy at their meeting on Wednesday, but they also signaled that they expect inflation to prove more stubborn that they had previously expected and indicated that they expect to raise interest rates by more next year than they had initially forecast.
Policymakers voted at this meeting to raise borrowing costs by half a percentage point, a pullback after four straight three-quarter point moves. Their policy rate is now set to a range of 4.25 to 4.5 percent, the highest its been since 2007.
After months of moving rapidly to make money more expensive — a bid to curb consumer and business demand and cool an overheating economy — central bankers are entering a phase in which they will adjust policy more cautiously. That will give them time to see how the labor market and inflation are reacting to the policy changes they have already put in place.
Yet the Fed’s economic projections, released on Wednesday for the first time since September, sent a clear signal that slowing the process does not mean that officials are letting up in their battle against rapid inflation. The fresh estimates underlined that borrowing costs will likely need to go higher and inflict more economic pain than previously anticipated in order to wrangle rapid inflation.
“We have more work to do,” Jerome H. Powell, the Fed chair, said during his news conference following the release.
Officials expect to raise interest rates to 5.1 percent by the end of 2023, suggesting that they will make another three-quarter point worth of adjustments. That will push borrowing costs half a percentage point higher next year than officials had previously anticipated. Officials also expect to maintain an elevated policy setting for longer — they anticipate that their policy rate will stand at 4.1 percent at the end of 2024, up from 3.9 percent previously.
That stance is expected to cool the economy notably. Central bankers expect unemployment to rise notably next year, jumping to 4.6 percent from 3.7 percent now and then remaining elevated for years. Growth is expected to be much weaker in 2023 than previously anticipated, pushing the economy to the brink of a recession.
The Fed’s more aggressive position comes as central bankers worry that inflation will remain stubbornly high for years to come. Though price increases are already beginning to moderate from their fastest pace in 40 years, Fed policymakers think it is going to take a long time to return inflation fully to their 2 percent goal. They see their preferred inflation measure ending 2023 at 3.1 percent and 2024 at 2.5 percent.
Mr. Powell has repeatedly emphasized that the central bank is determined to continue constraining growth until rapid inflation is thoroughly vanquished.
He said during his news conference that Fed officials need “substantially more evidence” to feel confident that inflation is on a sustained downward path. And given that, the Fed’s work is not done.
“It’s our judgment today that we’re not at a sufficiently restrictive policy stance, yet,” Mr. Powell said, underscoring that 17 of the Fed’s 19 officials expect rates to climb to or above 5 percent.