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Federal Reserve 'dot plot' shows interest rates peaking at 5.1% in 2023

The Federal Reserve raised the target range for its benchmark interest rate by 0.25% on Wednesday to a range of 4.75%-5%, the highest since October 2007.

Along with its policy announcement, the Fed also released updated economic forecasts in its Summary of Economic Projections (SEP), including its "dot plot," which maps out policymakers' expectations for where interest rates could be headed in the future.

The latest dot plot suggests rates will continue to tick higher in 2023, but only slightly, with benchmark interest rates seen peaking at 5.1% this year, on par with the Fed's previous December projection. Seven officials see raising rates higher than 5.25% this year, with one member seeing rates going as high as 6%.

No officials see rate cuts this year, although they do see rates coming down to 4.3% in 2024, slightly higher than December's outlook for rates to finish next year at 4.1%. This month's expectations for rates next year, however, were more widely distributed than in December.

Most notably, the Fed set the stage for ending its aggressive rate hiking cycle, doing away with language for "ongoing rate increases" in interest rates, stating in its policy statement: "The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time."

The SEP indicated the Federal Reserve sees core inflation peaking at 3.6% this year — higher than December's projection of 3.5% — before cooling to 2.6% next year and 2.1% in 2025.

Officials see unemployment rising to 4.5% this year, below the previous 4.6% forecast. Unemployment is expected to tick slightly higher to 4.6% next year and remain at that level through 2025.

The Fed also sees below-average economic growth, with the economy barely growing next year at just 0.4% (down from December's 0.5% projection) before picking up slightly to 1.2% in 2024 and 1.9% in 2025.

U.S. stocks were marginally higher following the announcement with the 10-Year Treasury yield down about 9 basis points to around 3.51%.

With additional reporting from Jennifer Schonberger

U.S. Federal Reserve Chair Jerome Powell responds to a question from David Rubenstein (not pictured) during an on-stage discussion at a meeting of The Economic Club of Washington, at the Renaissance Hotel in Washington, D.C., U.S, February 7, 2023. REUTERS/Amanda Andrade-Rhoades
U.S. Federal Reserve Chair Jerome Powell responds to a question from David Rubenstein (not pictured) during an on-stage discussion at a meeting of The Economic Club of Washington, at the Renaissance Hotel in Washington, D.C., U.S, February 7, 2023. REUTERS/Amanda Andrade-Rhoades (Amanda Andrade-Rhoades / reuters)

Alexandra is a Senior Reporter at Yahoo Finance. Follow her on Twitter @alliecanal8193 and email her at alexandra.canal@yahoofinance.com

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