Federal Reserve increases interest rates by 0.5 points

The Federal Reserve raised its benchmark interest rate by half a percentage point on Wednesday, a day after inflation figures showed a 7.1 percent year-over-year rise in prices.

The hike was less than the Fed’s last four consecutive jumbo hikes of 0.75 percent. Wednesday’s increase was the seventh this year and set rates at 4.25 to 4.5 percent, the highest in 15 years, further raising borrowing costs for businesses and consumers.

Chairman Jerome Powell, who steers the central bank on a fine line between reining in inflation and triggering a recession, vowed there would be “some pain” for Americans as the Fed tried to cool the market.

“Our general approach is to use our tools to bring inflation down to our 2% target,” Powell said at a news conference on Wednesday. “Reducing inflation is likely to require a sustained period of below-trend growth and some easing of labor market conditions.”

Tuesday’s Labor Department report on the consumer price index (CPI) showed inflation remains uncomfortably high, but has fallen well below its recent peak of 9.1 percent in June.

Inflation data for October and November “show a welcome reduction in price increases,” Powell said, but the Fed needs to see “much more evidence” to make sure inflation is trending lower.

Powell said the maximum benchmark interest rate could reach 5 percent. “Restoring price stability will likely require a tight policy stance for some time.”

November’s 7.1 percent annual inflation rate was lower than economists had expected and marked the lowest increase in 12 months since December 2021.

At the same time, the Fed is expected to signal that it is planning more rate hikes next year than previously forecast to try to beat the worst inflation in four decades. And most economists believe that Chairman Jerome Powell will emphasize that the Fed will likely keep its benchmark rate at its highest point for the next year, even after the hikes end.

When the Federal Reserve raises interest rates, it trickles into every sector, raising the cost of debt on credit cards, mortgages, car loans, and federal student loans. Since most Americans use credit cards to pay for groceries and essentials, they will end up paying higher prices even if inflation falls if they don’t pay off their credit cards every month.

On the plus side, those who have money in savings accounts will see higher gains with higher rates.

Earlier this week, the Treasury Secretary. Janet Yellen admitted that the United States is still at risk of recession and said that she does not expect inflation to be brought under control until the end of next year.

“I think by the end of next year you’ll see much lower inflation if there’s not…an unexpected shock,” Yellen told CBS 60 Minutes on Sunday.

“There is a risk of a recession,” Yellen added. “But it’s certainly not, in my opinion, something that’s necessary to reduce inflation.”

The new CPI report showed core inflation, excluding volatile food and energy prices, rose at an annual rate of 6 percent last month, down from a September high of 6.7 percent.

Grocery prices remain especially high, with food at home rising 12 percent in November from a year earlier. Rent has also risen uncomfortably fast, jumping 7.9 percent on the year in the new report.

But real-time measures of apartment rents and house prices are starting to fall after soaring at the height of the pandemic, changes that won’t show up in the CPI report until next year.

Used car prices, which had soared 45 percent in June 2021 compared to a year earlier, have fallen for most of this year. In November, its year-over-year prices actually declined 3.3 percent.

Other goods, particularly electronics, showed strong signs of moderation, with TV prices falling 17 percent from last year and smartphones falling 23 percent.

Consumers also got some relief from falling gasoline prices, which fell 3.6 percent from October to November.

On Monday, the national average price of gasoline was $3.26, 52 cents less than last month and six cents less than a year ago, according to AAA.

Inflation in the US continues to moderate, rising at an annual rate of 7.1 percent in November for the fifth straight month of declines

Inflation remains uncomfortably high, but has fallen well below its recent high of 9.1 percent in June.