Fed Officials Sharply Raise Their Forecasts of Rates and Unemployment, Downgrade GDP

The Federal Reserve officials sharply raised their expectations of interest rates, inflation, and unemployment, a summary of their economic forecasts showed Wednesday.

The median unemployment forecast of Fed officials at the September monetary policy meeting rose to 4.4 percent for next year, up from 3.9 percent at the July meeting. The forecast for 2024 was increased to 4.4 percent from 4.1 percent.

Inflation is now seen as running at 2.8 percent by the end of next year, up from 2.6 percent, and 2.3 percent the year after that, up from 2.2 percent. The figure for the end of this was revised up to 5.4 percent from 5.2 percent.  In July, the most recent date available, the personal consumption price index—the Fed’s preferred measure of inflation—was up 6.3 percent.

Core PCE prices, which exclude food and energy prices, are now seen as rising at a 5.4 percent rate at the end of this year and 2.8 percent next year, up from June’s expectations for 5.2 percent this year and 2.6 percent next year.

Officials now see the Fed’s interest rate target at 4.4 percent by the end of this year, indicating an expected range of 4.25 percent to 4.5o percent. That is 125 basis points more in hikes at the next two meetings, apparently suggesting Fed officials see another 75 basis point hike followed by a 50 basis point hike. At the July meeting, Fed officials projected the target rate would rise to only 3.4 percent.

The expectation for next year jumped to 4.6 percent, higher than most private sector analyst estimates and well above the 3.6 percent rate foreseen in July. The following year, the rate target is seen as falling to 3.9 percent, up from 3.4 percent in June.

The Fed also sees much less economic growth this year. At the July meeting, Fed officials thought GDP would grow 1.7 percent this year. Now they expect just 0.2 percent growth. Next year’s growth is seen as just 1.2 percent, down from 1.7 percent, and the following year’s at 1.7 percent, down from 1.9 percent.