The Federal Reserve is raising its benchmark interest rate a quarter of a percentage point, central bank officials saying on Wednesday, its eighth straight rise as policymakers try to rein in inflation.
The latest increase in the federal funds rate, what banks charge each other for short-term loans, is less than the Federal Reserve’s 0.5 percentage point. increase in december as well as a series of three-quarter point moves over the course of 2022.
With the latest increase, the Fed’s interest rate target is set in a range between 4.50% and 4.75%, its highest level since late 2007.
“Hikes in Progress”
The Fed said its price-cutting campaign is working, while indicating it plans to keep rates high for some time.
“Over the last year we have taken strong steps to tighten the monetary policy stance,” Fed Chairman Jerome Powell said at a news conference on Wednesday. “Still, we have more work to do. Price stability is the responsibility of the Federal Reserve.” and serves as the foundation of our economy,” he said.
“We expect the ongoing increases to be appropriate,” Powell added.
The move to ease the pace of monetary tightening, which was widely expected by economists and investors, comes amid signs the US economy is cooling and concerns about a possible recession later this year.
The Federal Reserve has been rapidly raising rates since March 2022 in an attempt to stamp out persistent inflation. High interest rates slow down the economy making it more expensive for consumers and businesses to borrow money. However, policymakers worry that raising rates too high could send the economy into a recession.
Although Powell has underscored his commitment to reining in inflation, the battle may be entering a different phase aimed at achieving a soft landing for the economy. The Fed alluded to the “scope” of any future rate hikes, in contrast to the wording in its December statement on the “pace” of tightening.
The language change, while nuanced, suggests the Fed will now use smaller rate hikes to rein in inflation, according to Morgan Stanley analysts.
Inflation in the US has fallen from an annual rate of 9.1% this summer, its highest level in four decades, to a more modest rate. 6.5% in December. The Fed has signaled that it wants inflation to fall closer to its 2% target before easing the pace of monetary tightening.
Unbalanced labor market
Despite cooling inflation and slowing economic growth, Powell said the labor market remains too strong to lower prices and wages to what the Fed considers healthy.
“The labor market remains extremely tight with the unemployment rate at a 50-year low, employment agency very high and wage growth high,” he said, adding that “the labor market remains unbalanced.”
The central bank fears that if workers can change jobs too easily and get higher wages, it could lead corporations to raise prices further, entrenching inflation.
“Reducing inflation is likely to require a period of below-trend growth and weakening labor market conditions,” it added.
When will interest rates go down?
Investors generally expect the Fed to halt rate hikes as the economy slows. Most analysts expect just one more rate hike, up to a maximum range of 5%, and many think the Fed will actually cut rates this year when the economy enters a mild recession.
However, Powell poured water on those expectations. If the economy performs in line with the Fed’s expectations of “slower growth, some weakening in labor market conditions, and inflation that is falling steadily, but not rapidly… it will not be appropriate to cut rates this year.” “, said.
Powell conceded that, with falling property prices, “the disinflation process has begun,” a comment that sent shares higher. Still, he cautioned against stopping rate hikes too soon. Falling prices of goods account for less than half of headline inflation, and the Fed wants strong evidence of lower prices in housing and other service sectors before closing the rate hike cycle.
“In this situation, where we still have the highest inflation in 40 years, the job is not quite done,” Powell said. “It would be too early to declare victory or to think that we really did it.”