The Fed Raises Rates, Lowers GDP Growth Forecast

The Fed lowered its growth outlook for the U.S. economy for 2022 and beyond

The Federal Reserve raised its target interest rate by 75 basis points (bps) or three-quarters of a percentage point to stem surging inflation, and projected a slowing economy and rising unemployment in the months to come.

Fed policymakers expect the federal funds rate would reach 3.4% by the end of the year, according to the Fed's so-called "dot plot" forecast. They project inflation, as gauged by the Personal Consumption Expenditures (PCE) Price Index to end the year at 5.2%. 

As for the economy, Fed members slashed their forecast for GDP growth in 2022 to 1.7%, down from 2.8%. They also lowered growth expectations for 2023 and 2024 to less than 2%.

"Both the higher-than-expected rate hike and growth forecast reductions show that the Fed is reckoning with the fact that it underestimated inflationary pressures and overestimated the stamina of the economic recovery. Capital markets are still getting used to this new reality, and will remain under pressure for the near future," said Caleb Silver, Editor in Chief of Investopedia.

Signs of Slowing Growth

Earlier this week, the Commerce Department's report on U.S. retail sales showed sales unexpectedly fell in May, in another sign of a slowing economy. Homebuilder sentiment also dropped to its lowest level in two years, as housing demand slowed in the wake of rising mortgage rates. Sentiment has fallen for six straight months.

The University of Michigan's index of consumer confidence slumped to a record low amid the rapid rise in inflation. The level is comparable to the low point reached in the middle of the 1980 recession.

GDP Projections
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