Fed sees jobless rate hitting 4.4 percent by 2023

Federal Reserve officials expect the unemployment rate to jump to 4.4 percent in 2023 after the central bank raises interest rates by another 1.25 percentage points before the end of this year.

The Federal Open Market Committee (FOMC), the Fed panel responsible for monetary policy, released new projections Wednesday after the central bank issued a 0.75 percentage point interest rate hike. The projections are not a formal Fed forecast, but a window into how key officials see the economy evolving.

Fed officials expect the unemployment rate to increase notably from its August level of 3.7 percent. The median 2023 unemployment rate projected by FOMC members rose to 4.4 percent in September, up from a 3.9 percent median in June. While Fed officials only see unemployment rising to 3.8 percent by the end of 2022, they are projecting a substantial increase in joblessness beginning in 2023.

An unemployment rate of 4.4 percent would be relatively low by historical standards, but significantly higher than the pre-pandemic level of 3.5 percent in February 2020. The U.S. has not seen unemployment at 4.4 percent since August 2017. Inflation also remained low before the onset of COVID-19, but the prevalence of high inflation may limit the strength of the labor market going forward.

Fed officials also expect to raise their baseline interest rate range to a span of 4.25 to 4.5 percent by the end of 2022 and keep rates close to that level through the end of 2023. The FOMC set a baseline range of 3 to 3.25 percent Wednesday, so the projections imply two more steep rate hikes before the end of this year.

The Fed is hopeful it can bring inflation back down toward its annual target of 2 percent at the expense of a slower economy and higher unemployment. The Fed expects annual inflation, as measured by the personal consumption expenditures price index, to fall to 2.6 percent in 2023 and 2.3 percent in 2024.

Even so, Fed officials have been forced to revise their expectations of inflation higher and their expectations for the strength of the economy lower throughout 2022 as the bank fails to get a handle on rapid price increases.