The Federal Reserve is likely to raise interest rates by three-quarters of a percentage point on Wednesday, something it hasn’t done in 28 years.
In reaction to rising inflation and unpredictable financial markets, the central bank will hike the rate that banks charge each other for overnight borrowing to a range of 1.5 percent-1.75 percent, a level not seen since before the Covid pandemic crisis began.
This rate is passed on to consumers, affecting practically all adjustable-rate products such as credit cards and home equity loans.
Along with the rate hike, here’s a short rundown of what the Fed is expected to do:
- Adjust its interest rate outlook using its “dot plot” of individual members’ forecasts.
- It should revise its forecasts for GDP, inflation, and unemployment. Economists believe the Fed will lower GDP predictions this year while upping inflation and unemployment forecasts.
- Change the language in its post-meeting statement to reflect present reflect realities, notably that inflation is running faster than expected, necessitating more aggressive efforts to keep price rises from reaching their highest level since December 1981.
According to Goldman Sachs, new language in the statement could indicate that the Federal Open Market Committee “anticipates that raising the target range expeditiously will be appropriate until it sees clear and convincing evidence that inflation is moderating,” which the firm told implies “a high bar for reverting to 25bp hikes.”
Fed Chairman Jerome Powell will speak to the media following the FOMC meeting. Powell will speak 30 minutes after the decision is expected at 2:00 p.m. ET.
Powell will be questioned on the Fed’s recent shift in rate forecasts. He and other officials have been promoting the idea that consecutive 50-basis-point rate rises were the most likely course of action.
In reality, Powell dismissed 75 basis points as an option during his previous press conference in May, stating it was “not something the committee is actively examining.” One basis point equals one tenth of a percentage point.
Now, Powell might signal that further 75-basis-point raises are likely if inflation does not begin to fall.