Inflation remains stubborn even as efforts to slow it drag on. The United States economy entered another period of tighter policy when the Federal Reserve opted for a third consecutive rate hike, lifting the target range by 0.75 percentage points to 3.0%–3.25%. It marks the highest federal funds rate since 2008. Market watchers anticipated a forceful move, and the Fed underscored that further increases are still possible if inflation does not retreat toward the 2% goal.
President Jerome Powell outlined the rationale during his much-anticipated speech to central bankers in Jackson Hole, Wyoming. He acknowledged why the curve needs to rise and conceded that higher borrowing costs will slow growth and temper the labor market. The message was clear: the goal is price stability, even if it comes with short-term pain for households and businesses alike.
The Fed also adjusted its outlook for the economy, trimming its GDP projections for the United States this year and into 2024. Current forecasts call for slower growth and a softer path ahead, with real GDP continuing to run below potential. The nation has already seen two consecutive quarters of contraction and is navigating an uncertain terrain, where a soft landing remains a significant challenge and the risks of a recession are not easily dismissed.
without ceasefire
Behind the inflation numbers lies the broader picture of price levels. June recorded the strongest inflation print in decades, followed by a milder July reading that did little to ease concerns. August data showed a retreat but remained above expectations. Core CPI, which excludes food and energy, continued to run higher than in July, signaling persistent inflationary pressures spreading across the economy.
The Fed’s projection for inflation, measured by the CPI, was revised for this year and the next. The central bank sees a path toward the 2% target, but at the same time anticipates inflation to stay above that mark through the forecast horizon. The market responded with bets that policy rates will edge higher in the near term before easing later in the curve, though the exact path remains uncertain.
Powell emphasized that the projections are not a promise of future moves; they are conditional on how the data evolves. The policy stance could tighten further if inflation proves more persistent, or it could ease if supply chains normalize and demand aligns with supply. He warned that the outlook is inherently uncertain and that gradual adjustments are more prudent than abrupt shifts.
The Fed’s approach centers on balancing two outcomes: preventing a runaway rise in prices and preserving a strong labor market. In the long run, restoring price stability is viewed as essential to sustaining maximum employment and stable growth. The central bank signaled that it will maintain a restrictive stance until its objectives are clearly on track.
The central bank noted that inflation remains elevated by a combination of demand beyond supply, pandemic-era disruptions, and price pressures in food and energy. The situation is further complicated by the ongoing impact of global events, including geopolitical tensions that contribute to energy costs and supply chain frictions. These factors together weigh on prices and economic activity worldwide.
Labor margin
In this environment, the Federal Reserve enjoys a relatively robust labor market cushion. Unlike some other major economies, the United States carries a mandate that includes both price stability and maximum employment. Recent data show steady job creation and a labor market that remains tight by historical standards, with unemployment hovering near multi-decade lows. Hiring has outpaced cooling demand, keeping wage pressures from retreating as quickly as hoped.
Nevertheless, the labor market is not immune to higher costs. As prices keep rising, employers and workers alike face a challenge: sustaining real wage gains while adjusting to elevated living expenses. The Fed expects unemployment to trend higher over time but only gradually, as the economy works through the adjustment period. Policymakers stress that the pursuit of price stability must not derail the objective of full employment.
Forecasts show unemployment inching up in the near term and then stabilizing at lower levels in the longer horizon. The central bank reiterates its commitment to a policy path that aligns inflation back toward the 2% target while supporting durable employment gains. This careful balance is aimed at preserving the conditions that allow businesses to invest and households to plan with greater confidence.