Fed Raises Rates by 0.75 Percentage Point, Largest Increase Since 1994

New projections showed all 18 officials who participated in the meeting expect the Fed to raise rates to at least 3% this year, with at least half of all officials indicating the fed-funds rate might need to rise to around 3.375% this year.

“We’re not trying to induce a recession now. Let’s be clear about that,” Fed Chairman

Jerome Powell

said at a news conference.

But he said it was becoming more difficult to achieve what is known as a soft landing, in which the economy slows enough to bring down inflation while avoiding a recession. That represented an implicit concession that the risks of a downturn could rise as the economy digests tighter monetary policy.

“It is not going to be easy,” Mr. Powell said. “There’s a much bigger chance now that it’ll depend on factors that we don’t control. Fluctuations and spikes in commodity prices could wind up taking that option out of our hands.”

The S&P 500 rose 54.51 points, or 1.5%, to 3789.99, snapping a five-day losing streak. U.S. government bonds rallied after sliding in recent weeks in a selloff that had pushed yields to their highest levels in more than a decade.

Last week, the Labor Department reported the consumer-price index rose 8.6% in May, driven by higher energy prices. Rising fuel prices and supply-chain disruptions from Russia’s war against Ukraine have sent prices up in recent months.

Mr. Powell’s comments indicated that the Fed “will have to keep jamming on the brakes even if growth struggles, and the market didn’t get it,” said

Priya Misra,

head of interest-rate strategy at TD Securities.

Ms. Misra warned that markets would face higher volatility until inflation is clearly diminishing. “Today, everyone is cheering, but if inflation has not peaked, we will have to go through the stress of the last few days all over again,” she said.

The Fed has faced growing criticism in recent weeks for not acting sooner to withdraw aggressive stimulus it deployed through most of last year. “Powell took a bold decision today, and it sends the kind of message the economy needs to hear,” said Rep. French Hill (R., Ark).

Expectations of a larger rate rise and a higher path of rate rises had convulsed bond markets in recent days. Over the five days through Tuesday, the two-year Treasury yield had climbed by 0.7 percentage point, the largest such increase since 1982, according to JPMorgan Chase.

Wednesday’s rate increase marked an abrupt change from unusually precise guidance delivered by many members of the rate-setting Federal Open Market Committee, who had indicated in recent weeks that they would raise rates by a smaller half percentage point, as officials did at their meeting last month.

Mr. Powell said the committee had decided to approve the larger rate rise because of concerns over recent data on inflation and expectations of future inflation, which economists say play a significant role influencing actual price rises. Mr. Powell said officials decided it didn’t make sense to wait until July to move to a larger rate increase.

The committee vote was 10-1, with Kansas City Fed President

Esther George

dissenting in favor of a half-percentage-point, or 50-basis-point, increase.

“Clearly, today’s 75-basis-point increase is an unusually large one, and I do not expect moves of this size to be common,” Mr. Powell said. “From the perspective of today, either a 50-basis-point or a 75-basis-point increase seems most likely at our next meeting” on July 26-27.

Wednesday’s rate increase returns the Fed’s benchmark rate to its level in early March 2020, before the Fed slashed it to near zero as the Covid-19 pandemic hit the U.S. economy But interest rates in the U.S. and many other wealthy nations remain at very low levels historically.

Mr. Powell said he expected the central bank would raise rates to levels designed to slow the economy. “We think that policy is going to need to be restrictive, and we don’t know how restrictive,” he said.

At the same time, Mr. Powell said he saw no signs of a broader slowdown in the economy. “You’re seeing continuing shifts in consumption…but overall spending is very strong,” he said.

Wednesday’s projections showed officials see the fed-funds rate peaking at around 3.75% by the end of 2023, up from the 2.75% rate that officials projected in March but slightly below what interest-rate futures markets had anticipated earlier this week.

Such a pace of increases would nevertheless represent the most aggressive rate-rise cycle since the 1980s. The central bank has also initiated a program to withdraw stimulus by shrinking its $8.9 trillion asset portfolio through attrition; the Fed is passively reducing its holdings as those securities mature.

The Fed’s monetary-policy statement removed a line that, in May, had indicated officials expected inflation to return to 2% and for the labor market to remain strong as it raised rates. Mr. Powell said the removal of that sentence reflected the sense that the Fed couldn’t reduce inflation to 2% by itself while maintaining a strong labor market.

“The worst mistake we could make would be to fail” to bring down inflation, Mr. Powell said. “It’s not an option. We have to restore price stability.”

The projections revealed that all but one official expect the unemployment rate to rise over the next two years, an implicit acknowledgment of rising recession risks. The median projection showed the unemployment rate, which stood at 3.6% in May, ending at 3.7% this year before rising to 4.1% in 2024.

“Powell told us policy is going to create a recession, but soft-peddled it enough to leave markets to figure that out for themselves,” said Steven Blitz, chief U.S. economist at TS Lombard.

The fed-funds rate, an overnight rate on lending between banks, influences other consumer and business borrowing costs throughout the economy, including rates on mortgages, credit cards, saving accounts, car loans and corporate debt. Raising rates typically restrains spending, while cutting rates encourages such borrowing.

The U.S. mortgage market has been slammed by the prospect of tighter money, and many lenders were quoting a 30-year fixed rate above 6% on Monday and Tuesday, levels that haven’t been reached since 2008. Two large real-estate brokerages announced layoffs on Tuesday as home-purchase demand has stalled.

Mortgage rates stood near 3% at the beginning of the year. “You can’t double mortgage rates in a six-month span and live to tell about it,” said

Lou Barnes,

a mortgage banker in Boulder, Colo., who expected housing to go through a sharp slowdown. “At 6%-plus, mortgages will be very painful.”

The Commerce Department reported Wednesday that U.S. retail sales—a measure of spending at stores, online and in restaurants—fell a seasonally adjusted 0.3% in May from the previous month. That was the first decline in month-over-month retail spending this year. Monthly job gains slowed in May, as did annual wage increases.

Markets began to anticipate the larger 0.75-percentage point increase after a disappointing inflation report on Friday, and again after The Wall Street Journal reported on Monday that such a move might occur on Wednesday.

Some former Fed economists said the central bank risked sparking greater market volatility after the surprising shift to a larger rate rise. “It raises questions of whether they’re in control of the situation. It is panicky,” said

Vincent Reinhart,

chief economist at Dreyfus and Mellon “It will be extremely difficult for them to control the narrative after doing 75 basis points.”

Others said they viewed Mr. Powell’s decision as a sign that he was more committed to bring down inflation even if it risked a downturn. “If he’s willing to blow up carefully laid plans to deliver a hawkish surprise, we should take him at his word that he will stay the course,” said

Ellen Meade,

who retired from the Fed last August as a senior policy adviser.

Corrections & Amplifications
Kansas City Fed President Esther George dissented in favor of a 50-basis-point increase. An earlier version of this article incorrectly said she was in favor of a 05-basis-point increase. (Corrected on June 15.)

Write to Nick Timiraos at nick.timiraos@wsj.com