The Federal Reserve raised its target fed funds rate by 0.75% on Wednesday to a new range of between 1.5% and 1.75%, its largest interest rate hike in 28 years.
“Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures,” the Fed said in a statement.
The Fed also reassured investors that the economy remains strong, citing an uptick in economic activity, high employment levels and recent job gains.
The statement comes after the U.S. added 390,000 jobs in May, significantly above the 325,000 jobs economists were expecting. Wage growth was up 5.2% in the month, and the U.S. unemployment rate remained at 3.6%.
All 12 FOMC voting members voted unanimously to raise interest rates. Committee member Esther George, was the lone member to vote for a less aggressive 0.5% hike.
Economic Projections: The Consumer Price Index (CPI) was up 8.6% in May, the highest inflation reading since 1981. In May, Federal Reserve Chair Jerome Powell said “there could be some pain involved to restoring price stability.”
On Wednesday, the Federal Reserve also released new “dot plot” economic forecasts. All 18 members are now projecting interest rates will reach 3% by the end of 2022. Five members now see interest rates topping 4% in 2023.
Federal Reserve members are projecting a 2022 U.S. unemployment rate of 3.7%, up from 3.5% March. The committee’s 2022 GDP growth projection dropped from 2.8% to 1.7%. The Fed’s 2023 GDP growth rate also dropped from 2.2% to 1.7%. The Fed is now projecting 2022 PCE inflation of 5.2%, up from previous estimates of 4.3%.
Markets React: The SPDR S&P 500 ETF Trust SPY traded off its highs for the day but remained up 0.5% after the Fed announcement. The yield on 10-year U.S. Treasury bonds decreased slightly on Wednesday to 3.42%, down 0.056% on the day.
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