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

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

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

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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Falling gas prices have slightly lowered headline
inflation, which was a still-painful 8.3% in August compared with a year
earlier. Those declining prices at the gas pump 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.

Speaking at a news conference, Chair Jerome Powell said
that before Fed officials would consider halting their rate hikes, they would
“want to be very confident that inflation is moving back down” to
their 2% target. He noted that the strength of the job market is fueling pay
gains that are helping drive up inflation.

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And he stressed his belief that curbing inflation is vital
to ensuring the long-term health of the job market.

“If we want to light the way to another period of a
very strong labor market,” Powell said, “we have got to get inflation
behind us. I wish there was painless way to do that. There isn’t.”

Fed officials have said they are 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 most economists are
skeptical. They 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.

“No one knows whether this process will lead to a
recession, or if so, how significant that recession would be,” Powell said
at his news conference. “That’s going to depend on how quickly we bring
down inflation.”

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In their updated economic forecasts, the Fed’s policymakers
project that economic growth will remain weak for the next few years, with
rising unemployment. They expect the jobless rate to reach 4.4% by the end of
2023, up from its current level of 3.7%. Historically, economists say, any time
unemployment has risen by a half-point over several months, a recession has
always followed.

Fed officials now foresee the economy expanding just 0.2%
this year, sharply lower than their forecast of 1.7% growth just three months ago.
And they envision sluggish growth below 2% from 2023 through 2025.

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Even with the steep rate hikes the Fed foresees, it still
expects core inflation — which excludes the volatile food and gas categories —
to be 3.1% at the end of next year, well above its 2% target.

Powell acknowledged in a speech last month that the Fed’s
moves will “bring some pain” to households and businesses. And he
added that the central bank’s commitment to bringing inflation back down to its
2% target was “unconditional.”

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. Last week, the average fixed mortgage
rate topped 6%, its highest point in 14 years, which helps explain why home
sales have tumbled. Credit card borrowing costs have reached their highest
level since 1996, according to Bankrate.com.

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Inflation now appears increasingly fueled by higher wages
and by consumers’ steady desire to spend and less by the supply shortages that
had bedeviled the economy during the pandemic recession. On Sunday, Biden said
on CBS’ “60 Minutes” that he believed a soft landing for the economy
was still possible, suggesting that his administration’s recent energy and
health care legislation would lower prices for pharmaceuticals and health care.

The law may help lower prescription drug prices, but
outside analyses suggest it will do little to immediately bring down overall
inflation. Last month, the nonpartisan Congressional Budget Office judged it
would have a “negligible” effect on prices through 2023. The
University of Pennsylvania’s Penn Wharton Budget Model went even further to say
“the impact on inflation is statistically indistinguishable from
zero” over the next decade.

Even so, some economists are beginning to express concern
that the Fed’s rapid rate hikes — the fastest since the early 1980s — will
cause more economic damage than necessary to tame inflation. Mike Konczal, an
economist at the Roosevelt Institute, noted that the economy is already slowing
and that wage increases — a key driver of inflation — are levelling off and by
some measures even declining a bit.

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Surveys also show that Americans are expecting inflation to
ease significantly over the next five years. That is an important trend because
inflation expectations can become self-fulfilling: If people expect inflation
to ease, some will feel less pressure to accelerate their purchases. Less
spending would then help moderate price increases.

The Fed’s rapid rate hikes mirror steps that other major
central banks are taking, contributing to concerns about a potential global
recession. The European Central Bank last week raised its benchmark rate by
three-quarters of a percentage point. The Bank of England, the Reserve Bank of
Australia and the Bank of Canada have all carried out hefty rate increases in
recent weeks.

And in China, the world’s second-largest economy, growth is
already suffering from the government’s repeated COVID lockdowns. If recession
sweeps through most large economies, that could derail the U.S. economy, too.

Even at the Fed’s accelerated pace of rate hikes, some
economists — and some Fed officials — argue that they have yet to raise rates
to a level that would actually restrict borrowing and spending and slow growth.

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Many economists sound convinced that widespread layoffs
will be necessary to slow rising prices. Research published earlier this month
under the auspices of the Brookings Institution concluded that unemployment
might have to go as high as 7.5% to get inflation back to the Fed’s 2% target.

“The risk is that the Fed acts more aggressively in
its mission to return inflation back to its 2% objective, pushing the funds
rate higher than previously expected and keeping it higher for longer,” Nancy
Vanden Houten, lead U.S. economist at Oxford Economics, said Wednesday after
the Fed’s meeting.