Fed hikes rates a quarter point, expects ‘continued’ hikes
The Federal Reserve raised its benchmark interest rate by a quarter of a percentage point on Wednesday and gave little indication that it was nearing the end of this hike cycle.
In line with market expectations, the Federal Open Market Committee responsible for setting rates raised the federal funds rate by 0.25 percentage points. That brings it to a target range of 4.5% to 4.75%, the highest since October 2007.
The move marked the eighth increase in a process that began in March 2022. The funds rate alone sets what banks charge each other for overnight borrowing, but it also affects many products. consumer debt.
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The Fed is aiming for hikes to bring down inflation which, despite recent signs of slowing, is still near its highest level since the early 1980s.
The post-meeting statement noted that inflation “has eased somewhat but remains elevated,” a change from previous language.
“Inflation data received over the past three months shows a welcome reduction in the monthly pace of increases,” Fed Chairman Jerome Powell said in his press conference after the meeting. “And while recent developments are encouraging, we will need a lot more evidence to be confident that inflation is on a sustained downward path.”
Markets, however, were waiting for signs from this week’s meeting that the Fed would end rate hikes soon. But the statement provided no such signal. At first, shares fell following the announcement, with the Dow Jones Industrial Average falling more than 300 points.
However, the market rebounded from Powell’s press conference, after he acknowledged that “the disinflationary process” had begun. Major averages eventually turned positive as market commentary focused on Powell’s somewhat upbeat comments on progress against inflation.
“We can now say that I think for the first time the process of disinflation has started,” Powell said, while noting that it would be “very premature to declare victory or to think that we really got this.”
Still, the Fed’s statement included language noting that the FOMC still sees the need for “continued target range increases.” Market participants had hoped for some softening of the phrase, but the statement, unanimously approved, kept it intact.
The statement changed a part by describing what will determine the future political path.
Officials said they would determine the “magnitude” of future rate increases based on factors such as the effects of rate hikes so far, the lags in which policy has an impact and changing conditions. finance and economy. Previously, the statement said it would use these factors to determine the “pace” of future increases, a possible nod that the committee sees an end to the increases somewhere, or at least a continuation of smaller moves ahead.
In 2022, the Fed approved four consecutive moves of 0.75 percentage points before moving to a smaller increase of 0.5 percentage points in December. In recent public statements, several officials said they believed the central bank could at least reduce the magnitude of the hikes, without signaling when they might end.
As it raised its benchmark rate, the committee called economic growth “modest”, while noting only that unemployment “remained low”. The latest labor market assessment omitted previous language that employment gains have been “robust”.
Otherwise, the statement remained intact from previous messages as the Fed continues its efforts to stop inflation.
The Fed resolutely focused on inflation
Fed policy is thought to work with a lag – when the central bank raises rates, it takes time for the economy to adjust to tighter controls on the currency.
This particular cycle of inflation started because of Covid-related factors such as clogged supply chains and increasing demand for goods versus services. The war in Ukraine has aggravated rising gas prices, while unprecedented fiscal and monetary stimulus has fueled rising costs for a variety of goods and services.
Food prices have increased by more than 10% over the past year. Prices for eggs alone have soared 60%, butter more than 31% and lettuce 25%, according to Labor Department data through December. Gasoline prices fell toward the end of 2022 but have been rising in recent days, hitting $3.50 a gallon nationwide for an increase of about 30 cents over the past month, according to AAA.
Fed officials remained committed to tackling inflation, although they said recent numbers show pressures may be easing. The consumer price index fell 0.1% in December on a monthly basis and rose 6.5% from a year ago – down from a peak of 9% in the last summer, but still well above the point where the Fed feels comfortable.
Fed purchase of bonds
Along with the rate hikes, the Fed reduced holdings in its bond portfolio. This has resulted in a reduction of about $445 billion since June, as the Fed has targeted a capped level of $95 billion in maturing bonds that it allows to be withdrawn each month rather than reinvested.
The balance sheet reduction was the equivalent of about 2 percentage points in additional rate hikes, according to the San Francisco Fed. The balance sheet is still over $8.4 trillion.
Markets are watching where the Fed will finally end the hikes.
Responding to a question from CNBC’s Steve Liesman, Powell said it was “possible” for the funds rate to stay below 5%. But he also said the Fed was unlikely to cut rates this year unless inflation fell faster.
Fed hikes rates a quarter point, expects ‘continued’ hikes
