Federal Reserve officials on Wednesday slowed their campaign to cool the economy but indicated that interest rates would rise higher in 2023 than previously expected as inflation proves more stubborn than policymakers had hoped.
Fed officials voted unanimously at the conclusion of their two-day meeting to raise borrowing costs by half a percentage point, a pullback after four consecutive three-quarter point increases. Their policy rate is now set to a range of 4.25 to 4.5 percent, the highest it has been since 2007.
After months of moving rapidly to make money more expensive in an attempt to rein in an overheating economy, central bankers are entering a phase in which they expect to 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 latest economic projections, released on Wednesday for the first time since September, sent a clear signal that slowing the pace of rate increases does not mean that officials are letting up in their battle against rapid inflation. Borrowing costs are expected to rise more drastically and inflict more economic pain than central bankers previously anticipated as policymakers attempt to wrangle stubborn price increases.
“We’ve continually expected to make faster progress on inflation than we have,” Jerome H. Powell, the Fed chair, said during his news conference after the release. He described the Fed’s new expectations as: “slower progress on inflation, tighter policy, probably higher rates, probably held for longer, just to get you to the kind of restriction that you need to get inflation down to 2 percent.”
Officials are now expecting to raise their policy interest rate to 5.1 percent by the end of 2023, which would mean another three-quarter-point worth of adjustments and would push it half a percentage point higher next year than officials previously anticipated. Policymakers also expect to keep borrowing costs higher for longer.
“We have more work to do,” Mr. Powell said.
The Fed’s higher rates are expected to cool the economy notably next year. Central bankers predict that unemployment will jump to 4.6 percent from 3.7 percent now, and then remain elevated for years. Growth is expected to be much weaker in 2023 than previously anticipated, pushing the economy to the brink of a recession.
“I don’t think anyone knows whether we’re going to have a recession or not, and if we do, whether it’s going to be a deep one or not,” Mr. Powell said. “It’s not knowable.”
The central bank’s aggressive stance comes as central bankers worry that inflation will remain high for years to come. Though price increases are already beginning to moderate from the four-decade highs they reached this summer, the Fed’s economic projections make clear that policymakers think it is going to take years to return inflation fully to their 2 percent goal.