Fed Raises Key Rate by a Half-Point; Signals More to Come

The Federal Reserve recently reinforced the fight against inflation when it raised its key interest rate for the seventh time in a year and signaled additional hikes. However, this hike is smaller than the ones at the past four meetings as there are signs of inflation easing. 

The Fed made it clear in a news conference and statement by Chairman Jerome Powell, that he believes sharply raising rates is still necessary to fully get the worst inflation bout to hit the economy in four decades under control. 

The central bank’s benchmark rate was boosted a half-point to a range of 4.25% to 4.5%, the highest in 15 years. Although the hike is lower than the prior three-quarter-point hikes, the recent move will likely increase the costs of many business and consumer loans and the risk of entering a recession. 

The latest race hike was announced a day after an encouraging report showed inflation in the U.S. slowed in November for the fifth consecutive month. The increase of 7.1% year-over-year, though still considered high, is sharply lower than the June 9.1% peak. 

“The inflation data in October and November show a welcome reduction,” said Powell at a news conference. “But it will take substantially more evidence to give confidence that inflation is on a sustained downward path.”

Fed policymakers are predicting higher unemployment and slower growth for 2023 and 2024. The unemployment rate is expected to rise to 4.6% by the end of 2023, up from 3.7%. It would mark an increase in joblessness that would reflect a recession. 

Though Chairman Powell thought the economy may still be able to avoid a recession, Fed economic forecasts show policymakers expect the higher rates to increase job losses. “I don’t think anyone knows whether we’re going to have a recession or not. …I wish there were a completely painless way to restore price stability. There isn’t,” said Powell. 

Fed officials say they see evidence of improving inflation

Recently, Fed officials have shown signs that they see some evidence of improvement in their drive to bring inflation down to their annual target of 2%. The nationwide average for a gallon of regular gas fell from $5 to $3.21 in June.

Several supply chains need to be backed up, reducing the price of goods. The November inflation data is better-than-expected and shows the prices for furniture, toys, and used cars all fell last month. Other services costs also plummeted, from airfares to car rentals to hotels. 

Home prices and the price of rentals have also started inching lower, though those figures have yet to feed into the government data. 

Inflation continues to ease slightly in the United Kingdom and Europe, leading analysts to expect the Bank of England and the European Central Bank to slow down the pace of rate hikes at their upcoming meeting. Both banks are expected to raise rates by half a point to target the continuing high prices after significant three-quarter-point increases. 

Inflation in the 19 countries that use euro currency fell to 10% from the 10.6% seen in October, marking the first decline since June of 2021. 

Several economists think the Fed will slow down to a quarter-point rate hike when it meets early in the new year. Powell has yet to decide how large he expects the next hike to be. Powell has yet to determine how big the next hike should be. Having quickly raised rates, he said, “we think the appropriate thing to do now is to move at a slower pace. That will allow us to feel our way.”

Fed officials have indicated they want rates to reach “restrictive” levels to bring inflation down to the target range by slowing hiring and growth. With many employers in the service sector still desperately looking to hire more workers, Powell said pay growth could remain higher than what is consistent with the Fed’s inflation target. 

“We have a long way to go to get to price stability,” said Powell.