The Federal Reserve has raised its benchmark interest-rate target by three-quarters of a percentage point for a third consecutive meeting, bringing the federal funds range to 3% to 3.25% and signaling that officials expect substantially tighter policy to persist as they try to bring inflation back toward 2%.

The Federal Open Market Committee voted unanimously Wednesday for the increase and said “ongoing increases” will likely be appropriate. With the move, the central bank has lifted its policy rate by 3 percentage points since the beginning of the year, an unusually rapid tightening cycle aimed at slowing demand after inflation remained broad and persistent through the summer.

The rate path moved sharply higher

The accompanying Summary of Economic Projections showed a median estimate for the federal funds rate of 4.4% at the end of 2022 and 4.6% at the end of 2023. That year-end 2022 projection implies roughly another 1.25 percentage points of tightening over the final two meetings if policy follows the median path.

Officials simultaneously cut their median projection for 2022 real GDP growth to 0.2%, from 1.7% in June, and projected the unemployment rate would rise to 4.4% by the end of 2023. Those forecasts make explicit the tradeoff embedded in the current policy: the Fed expects slower growth and some labor-market weakening as the cost of reducing price pressure.

Chair Jerome Powell said in his post-meeting press conference that policy is being moved “purposefully” toward a level restrictive enough to return inflation to 2%. He emphasized that the central bank is looking for compelling evidence that inflation is moving down and warned that restoring price stability will probably require maintaining a restrictive stance for some time.

August inflation closed the door on an early slowdown

The latest consumer-price report reinforced the case for aggressive tightening. The Bureau of Labor Statistics said the consumer price index rose 8.3% over the 12 months through August. Headline inflation increased 0.1% during the month even though gasoline prices fell 10.6%, because shelter, food and medical-care costs continued rising. Core CPI, excluding food and energy, increased 0.6% in August and 6.3% from a year earlier.

Those figures weakened hopes that lower gasoline prices alone would produce a rapid deceleration in overall inflation. Powell noted that price pressures remain visible across a broad set of goods and services and that the risk of inflation becoming embedded in expectations rises the longer elevated readings persist.

The Committee’s statement also continued to cite Russia’s war against Ukraine as a source of upward pressure on food and energy prices and a drag on global growth. At the same time, the labor market remains unusually tight, with unemployment near a half-century low and job vacancies still elevated.

Tightening now includes rates and the balance sheet

The Fed is not relying only on the federal funds rate. Its implementation note maintains accelerated balance-sheet runoff, allowing up to $60 billion of Treasury securities and $35 billion of agency mortgage-backed securities to mature without reinvestment each month. That process removes another source of monetary accommodation as interest rates rise.

The implementation decisions also raised the interest rate paid on reserve balances to 3.15% and the primary credit rate to 3.25%. The Board followed with a September 22 discount-rate action approving the 3.25% primary credit rate for additional Federal Reserve Banks.

Together, those measures tighten financial conditions through several channels. Short-term borrowing becomes more expensive, mortgage and corporate financing costs rise, and the reduced Federal Reserve balance sheet leaves more securities for private markets to absorb. Housing is already showing the effects: Powell said residential activity has weakened significantly as mortgage rates climbed.

The Fed is explicitly warning against stopping too early

Powell’s message this week is consistent with the unusually direct speech he delivered at Jackson Hole on August 26. In those remarks on price stability, he said reducing inflation would likely require a sustained period of below-trend growth and softer labor-market conditions, and he invoked the historical cost of allowing inflation to become entrenched before policy responds decisively.

That history is shaping the current risk calculation. The Fed faces the possibility that raising rates rapidly will weaken employment and growth more than expected. But officials are also concerned that slowing too soon could allow households and businesses to begin assuming that high inflation will persist, making it more difficult and costly to restore price stability later.

The September projections therefore matter as much as the three-quarter-point increase itself. Officials are not presenting this move as the likely peak of the cycle. Their median path places rates materially higher by December and slightly higher still in 2023 before any decline appears in the forecast.

For households and businesses, the tightening is moving from an abstract policy shift to a direct financial constraint. Credit cards, auto loans, mortgages and corporate borrowing are repricing around a much higher interest-rate environment. The central bank’s judgment is that those tighter conditions are necessary to slow demand enough for supply and demand to rebalance.

The next question is not whether rates are rising, but how high they must go and how long they must remain there. With inflation at 8.3%, the Fed’s answer this week is that the burden of proof has shifted: officials want clear evidence that price pressures are retreating before they consider easing the pace of restraint.