The Federal Reserve rising interest rates by three-quarters of a percentage point on Wednesday, its biggest move since 1994, as the central bank steps up efforts to tackle the fastest inflation in four decades.

The sharp rise in rates, which markets were expecting, underscored that Fed officials are determined to crush price increases, even if it comes at a cost to the economy.

As a sign of how the Fed expects its policies to affect the economy, officials predicted that the unemployment rate would rise to 3.7% this year and 4.1% by 2024, and that growth would slow significantly as policymakers sharply raise borrowing costs and stifle economic demand.

The Fed’s key rate is now set in a range between 1.50 and 1.75 and policymakers are suggesting more rate hikes ahead. The Fed, in a new round of economic projections, forecast interest rates to hit 3.4% by the end of 2022. That would be the highest level since 2008 and officials saw their key rate peak at 3.8% at the end of 2023. These figures are significantly higher than previous estimates, which showed rates peaking at 2.8% next year.

Fed officials have also recently indicated that they plan to cut rates in 2024, which could be a sign that they think the economy will weaken so much that they will have to reorient their policy approach. The main takeaway from the Fed’s economic forecast, which it released for the first time since March, is that officials have become more pessimistic about their chances of a soft drop in the economy.

Underlining this, policymakers cut a sentence from their post-meeting statement that predicted inflation could moderate as the labor market remained strong – a hint that they think they may need to tighten the brakes on employment growth to control inflation.

“Inflation remains elevated, reflecting pandemic-related supply and demand imbalances, rising energy prices and broader price pressures,” the Fed reiterated in its post-market statement. meeting.

One official, Federal Reserve Bank of Kansas City President Esther George, voted against the rate hike. Although Ms George has always worried about high inflation and favored higher interest rates, she would have preferred a half-point move in this case.

Until the end of last week, markets and economists broadly expected a half-point move. The Fed had raised rates by a quarter point in March and half a point in May, and signaled that it expected to continue to rise at that rate in June and July.

But central bankers have received a series of bad news on inflation in recent days. The consumer price index rose 8.6% in May from a year earlier, the fastest rate of increase since the end of 1981, with the monthly inflation rate remaining high even after the removal of food and fuel prices.

While the Fed’s favorite inflation gauge – the personal consumption expenditure measure – is slightly lower, it also remains too warm for comfort. And consumers are starting to expect faster inflation in the months and even years to come, based on survey data, which is a worrying development. Economists believe that expectations can be self-fulfilling, causing people to demand wage increases and accept price hikes in a way that perpetuates high inflation.

It is increasingly unlikely that the Fed will be able to quickly and gently cool inflation to the 2% annual rate it is targeting on average and over time.

The central bank has tried to put the economy on a more sustainable path without pushing it into a crushing recession that is costing jobs and stunting growth. Policymakers hoped to raise borrowing costs to reduce demand just enough to balance supply and demand without inflicting major pain. But as price increases prove stubborn, achieving this so-called soft landing becomes more difficult.

Interest rate hikes by the central bank are already rippling through the wider economy, raise mortgage rates and help the housing market begin to cool. Demand for other consumer goods shows signs to start to slow as money becomes more expensive to borrow and companies can scale back their expansion plans.

The aim is to dampen demand enough to allow supply – which remains constrained due to global factory shutdowns, shipping issues and labor shortages – to catch up.

But curbing demand without curbing growth is hard to do, especially since consumption makes up the largest part of the US economy. If the Fed has to drastically restrict spending in order to rein in price increases, it could lead to job losses and the closure of businesses.

Markets are increasingly concerned that central bank policy is causing a recession. Stock prices have fallen and bond market signals are flashing red as Wall Street traders and economists increasingly expect the economy to tip into a slowdown, possibly next year .