The Fed Raises Rates as Expected, But Spooks Investors With a Gloomy Forecast

The Federal Reserve today (Dec. 14) raised interest rates by 0.5 percent to a range of 4.25 percent to 4.5 percent, a sign inflation is finally easing. The rate increase was exactly what investors expected, but the central bank’s gloomy outlook on the U.S. economy next year sent major stock indexes falling after the rate hike announcement.

The Dow Jones Industrial Average fell 400 points, or 1.1 percent, in the afternoon following the Fed’s announcement; the S&P 500 index slid 1.7 percent; and the tech-heavy Nasdaq Composite dropped more than 2 percent.

The Fed lifted its forecasts for both the unemployment rate and inflation in 2013 and projects gross domestic product (GDP) to grow only 0.5 percent next year, the slowest pace since 2009 (with the exception of 2020, the pandemic year). The unemployment rate is expected to rise to 4.6 percent by the end of 2023 from the current 3.7 percent.

Inflation, a primary driver of the Fed’s rate hikes this year, is cooling down—but not as quickly as the central bank previously thought. Consumer prices are expected to rise 5.6 percent this year, up from the Fed’s previous projection of 5.4 percent. By the end of 2023, inflation could further fall to 3.1 percent, but higher than the previously anticipated 2.8 percent.