The Federal Reserve on Wednesday slowed the pace of its interest rate hikes but signaled additional rate increases this year will likely be necessary in order to cool inflation that remains elevated—dashing investor hopes that the central bank may soon pivot from its most aggressive economic tightening campaign in three decades.
At the conclusion of its two-day policy meeting on Wednesday, the Federal Open Markets Committee said it would raise the federal funds rate (the rate at which commercial banks borrow and lend reserves) by 25 basis points to a target range of 4.5% to 4.75%—the highest level since early 2008.
In the announcement, officials acknowledged inflation has “eased somewhat,” but cautioned it remains “elevated,” and that additional rate increases “will be appropriate” in order to further ease rising prices.
In a press conference Wednesday afternoon, Fed Chair Jerome Powell said officials will need to see “substantially more evidence” that inflation is cooling in order to pivot on policy and also stated they would probably hike rates “a couple” more times.
The overall announcement “recognizes that things are changing for the better,” says Pantheon Macro chief economist Ian Shepherdson, who notes “the Fed is taking baby steps” ahead of key inflation readings due out before the central bank’s next meeting concludes in March.
The Fed began raising rates as inflation reached a 40-year high in March, but expectations for the pace and intensity of incoming rate hikes have grown more aggressive amid stubborn price gains and criticism that the central bank waited too long to start the hikes. The increases, which work to slow inflation by tempering consumer demand, have already sparked downturns in the housing and stock markets, and a growing number of experts worry the turmoil could ultimately spark a deep global recession. Since the last meeting in December, however, economic data on wage growth and inflation has been encouraging, showing signs inflation is abating enough for the Fed to ease up on its aggressive policy.
What To Watch For
The Fed’s next interest rate announcement is slated for March 22. Economists at Goldman Sachs expect the Fed will deliver quarter-point hikes at its next two meetings and then hold top interest rates at 5.25%, the highest level since 2007, for the rest of the year. However, they note fewer hikes might be needed if weak business confidence hurts the labor market too much, while more might be needed if the economy reaccelerates too quickly.
6.5%. That was the annual inflation rate as measured by the consumer price index in December. It’s down from the peak of 9.1% in June and 7.1% in November, but still vastly higher than the Fed’s long-time target of 2%.
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