Fed raises rate by 0.75% for third time straight worsening forecasts

The Federal Reserve approved its third straight 75 basis point rate hike on Wednesday as part of an aggressive crackdown on the raging inflation that is plaguing the U.S. economy.

Until a few months ago, no one would have thought such a massive increase would be possible. Since then, the central bank's target range for the lending rate has risen to 3%-3.25%. The rate is a record high — the last time it reached this level was during the global crisis in 2008.

Wednesday's decision is the Fed's toughest move to fight inflation since the 1980s. The decision is likely to raise borrowing costs, which will hit U.S. businesses and households.

Federal Reserve Chairman Jerome Powell acknowledged that this rapid tightening regime could hurt the economy. At a press conference on Wednesday, he said that no one knows if this process will lead to a recession and, if it does, how severe the recession will be.

The Fed's updated economic forecast summary released Wednesday reflects that pain: The quarterly report showed a less optimistic outlook for economic and labor market growth. In addition, the median unemployment rate will rise to 4.4% in 2023, higher than the 3.9% forecast by Fed officials in June, and well above the current rate of 3.7%.

U.S. GDP growth for the year has been revised up to 0.2% from 1.7% in June. That's well below analysts' estimates: Bank of America economists had assumed that GDP growth would be revised up to 0.7%.

Inflation forecasts also rose. Core personal consumption spending will reach 4.5% this year and 3.1% in 2023. In June, forecasts were 4.3% and 2.7%, respectively.

Probably the most important information for investors is the federal funds rate forecast. This forecast indicates what officials believe to be the appropriate policy direction for future rate hikes. The data released Wednesday shows that the Federal Reserve expects interest rates to remain high in coming years. 

The median federal funds rate forecast was revised upward for 2022 from 3.4 percent to 4.4 percent. The rate was also revised up from 3.8% to 4.6% for 2023 and from 3.4% to 3.9% for 2024. It is expected to remain at 2.9% in 2025.

Judging by the updated projections, the risks of a "hard landing" are growing. "Hard landing" is a tightening of monetary policy to end a period of inflation, accompanied by the onset of a recession. The projections also show that the Fed is willing to accept economic pain in an effort to reduce inflation.

Despite this, the labor market remains resilient and consumer spending is high. The significant jump in mortgage rates has not affected home prices — they are still high. The Fed probably thinks the economy can handle a more aggressive rate hike.