The Federal Reserve issues a smaller interest rate hike of a quarter point

The Federal Reserve raised its target interest rate by a quarter of a percentage point, noting that while inflation is declining, it is still high enough to require more rate increases.

The hike announced Wednesday put the benchmark US central bank overnight interest rate in the range of 4.50% to 4.75%, the highest since November 2007, when rates were cut. at the beginning of the financial crisis.

While this increase was smaller than the previous hike, and even higher rate hikes before that, the Fed’s latest move will further increase the costs of many consumer and business loans, and could increase the risk of a recession.

In a policy statement, the Fed went on to promise “continued increases” in borrowing costs, a sign that policymakers intend to raise their benchmark rate again when they meet in March and perhaps in May as well.

Still, major stock indexes, which had spent the day in the red, surged into positive territory as Fed Chairman Jerome Powell spoke after the decision, with the S&P 500 gaining 1.59% at the end of the week. session.

“We will need a lot more evidence to be sure that inflation is on a sustained and prolonged downward trajectory,” Powell said.

“It would be too early to declare victory or to think that we really did it,” Powell added. “We have to complete the job.”

Fed policymakers hope to avoid triggering a recession, and economic data since its last policy meeting in December has generally moved in the right direction.

Although inflation remains painfully high, it is slowing under the impact of higher interest rates, while the economy continues to grow and create jobs at a reasonable rate.

“The Fed is not done fighting inflation,” said John Leer, chief economist at decision-intelligence firm Morning Consult. “Anyone who thought the Federal Reserve had won the war on inflation should prepare for a protracted battle.”

Although the labor market remains tight, Leer said that “it is still premature to conclude that American workers will emerge unscathed from this cycle of hikes,” as the full impact of higher interest rates on the labor market has yet to play out.

The Fed is trying to control inflation by slowing the economy with higher interest rates, but hopes to avoid triggering a recession.

For consumers, higher rates are likely to mean higher interest payments for credit cards and variable-rate loans.

However, mortgage rates are holding close to 6% after peaking at 7% in October, and experts expect them to remain relatively stable or fall further.

Mortgage rates broadly track yields on the 10-year Treasury note, which have fallen significantly in the past month amid signs of slowing inflation.

The Fed is trying to walk a tightrope by raising rates enough to combat inflation, without driving the economy into a full-blown recession.

Many economists and business leaders expect a recession sometime in 2023, although there have been recent signs that the economy remains stronger than expected.

“Recent events suggest that the coming year may be a little less challenging than previously thought,” Nathan Sheets, Citi’s chief global economist, wrote in a note this week.

Sheets noted that recessionary risks were easing globally, while US data “pointed to continued growth, subdued inflation and a slower pace of Fed rate hikes.”

Ahead of the Fed’s two-day meeting this week, the International Monetary Fund raised its outlook for a global economy that officials say has proven “surprisingly resilient” in the face of monetary policy tightening and the ongoing war between Russia. and Ukraine.

The Fed’s policy statement on Wednesday went on to promise “continued increases” in borrowing costs as part of its unresolved battle against inflation.

“Inflation has eased a bit, but it’s still high,” the US central bank said, acknowledging progress in slowing the pace of price increases from 40-year highs reached last year.

Russia’s war in Ukraine, for example, was still seen as adding to “elevated global uncertainty,” the Fed said. But policymakers have abandoned the language of earlier statements citing the war and the COVID-19 pandemic. as direct contributors to rising prices.

Still, the Fed said the US economy was enjoying “modest growth” and “robust” job gains, with policymakers still “very vigilant about inflation risks.”

“The (Federal Open Market) Committee anticipates that continued increases in the target range will be appropriate to achieve a monetary policy stance that is tight enough to return inflation to 2% over time,” the Fed said.

Surprised last year by rising inflation that turned out to be much more persistent than the Fed anticipated, policymakers approved the fastest interest rate increases since the 1980s.

Starting with a quarter percentage point increase in March, by the summer the central bank was raising rates in three-quarter percentage point increments and, in total, raised the policy rate target by 4.25 percentage points in just 10 months.

The Fed slowed its huge rate hikes with a half percentage point increase at its December 13-14 policy meeting.

The impact of political movements seems to be gaining strength. New data from last week showed that a key measure of inflation slowed faster than expected in December, continuing a six-month downward trend.

Labor cost growth, closely watched as a possible indicator of future price rises, also slowed in the fourth quarter.

But the Fed’s preferred measure of inflation, the personal consumption expenditures price index, still rose at an annual rate of 5% in December, down from a June high of nearly 7% but still more than double the rate. central bank’s 2% inflation target.

New data released Wednesday also showed that a closely watched measure of worker demand remained elevated, with the number of job openings in December topping 11 million at a level nearly double the number of people unemployed. .

The mismatch between the number of job vacancies compared to the number of job seekers is one of the main economic imbalances that the Fed says can keep inflation high.

Policymakers insist that they will not make what they see as the crucial mistake of pausing further rate hikes until they are convinced that inflation is on a durable path back to the 2% target.