Fed raises interest rates in smallest hike since March
The Federal Reserve raised interest rates by 0.25 percentage points on Wednesday at its first meeting of the year, its eighth straight rate hike since it began a program of tightening borrowing costs last year in an effort to bring down inflation.
It’s the smallest rate hike since last March, coming off a 50 basis point hike in December that followed four 75 basis point hikes starting last June. It will lift the federal funds rate to a range of 4.5 to 4.75 percent as the Fed pushes toward a projected target rate of 5.1 percent, which was last updated in December.
The more modest increase comes as inflation has been falling throughout the economy. The consumer price index (CPI) has dropped every month since June, landing at 6.5 percent annually in December. The personal consumption expenditures price index (PCE), which is the Fed’s preferred gauge of inflation, has fallen to 5 percent annually, off a June high of 6.8 percent.
With inflation coming down and unemployment levels remaining at a 50-year low, the Fed is aiming for what it calls a “soft landing,” meaning it wants to bring inflation back down to an annual rate of 2 percent without triggering a serious recession.
“There has been a significant deceleration in inflation in the second half of 2022, and simultaneously, productivity rebounded. That opens the door for the FOMC [Federal Open Markets Committee] to scale back its rate increases to increments of 25 basis points. In view of this, there is a strong chance the FOMC could engineer a soft landing,” Boston College economist Brian Bethune wrote in an analysis of the Fed’s current thinking.
But slowing down rate hikes too quickly could risk entrenching inflation above the Fed’s target — something banks and investors in the private sector are wary of.
“The pace of increase in employment costs remains high and is not consistent with a 2 percent inflation rate that the Fed targets, which means Fed officials have more work to do,” Kathy Bostjancic, an analyst for insurance company Nationwide, wrote in a statement on Tuesday.
At a press conference later on Wednesday, Fed Chairman Jerome Powell will likely signal whether the central bank intends to continue raising interest rates after its March meeting, at which another 0.25-point rate hike is expected, or if the March hike will be the last.
Further hikes could mean that the Fed’s terminal interest rate may end up above the 5.1 percent rate that’s currently projected.
It could also mean that the Fed’s projected unemployment rate for 2023, which stands at 4.6 percent, could also climb higher. The current unemployment rate is 3.5 percent, more than a full percentage point below the estimate for this year.
Source: The Hill
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