The Fed raised interest rates by a quarter point and signals more to come

WASHINGTON — Federal Reserve officials on Wednesday raised interest rates for the eighth time in a year and signaled the possibility of two more hikes as they continue to battle against rapid rate gains. But they did agree to a smaller increase than in the past and acknowledged that inflation had finally begun to ease meaningfully.

The central bank concluded its first meeting in 2023 by announcing a quarter-point interest rate increase, the smallest adjustment since March. The Fed’s policy rate is now set in a range of 4.5 to 4.75 percent, up from nearly zero a year ago.

Wednesday’s move marks a significant slowdown from last year, when the Fed raised borrowing costs at the fastest pace Since the 1980s in an effort to curb spiraling inflation. Price gains have now eased, with the Fed’s preferred inflation indicator at 5 percent In December, down from the peak nearly 7 percent in June.

With interest rates already rising, central bankers are gradually adjusting policy as they wait to see how higher borrowing costs affect consumers and businesses. Upcoming economic readings will help determine how high the Fed ultimately raises interest rates and how long to keep them there.

Jerome H. Powell, Chairman of the Federal Reserve, made clear during his press conference on Wednesday that the central bank intends to be cautious about declaring victory over inflation. He said “a couple more” price increases were under discussion to ensure that price pressures came back strong and fully under control.

“We can now say, for the first time, that the process of deinflation has begun,” Powell said, but later added: “We will continue the course until the job is done.”

Despite this, Wall Street welcomed Mr. Powell’s comments on Wednesday as a sign that the Fed may stop raising interest rates very soon – after March. Stocks rose during his speech, and expectations that the central bank will end its adjustments after that Another rate move has been solidified. Market prices also indicate that investors have increased the chances that the Fed will cut interest rates significantly by the end of the year. The S&P 500 rose 1 percent, adding to a rally that has lifted stocks more than 7 percent this year.

The disconnect between Fed data and investor expectations is due in part to what is actually happening in the economic data versus what is expected to happen next. Many forecasters expect the labor market to weaken, as well as inflation in many types of services, this year as the full impact of the Fed’s interest rate moves plays out; On the other hand, the Fed is waiting for more clear signals in the data.

The Fed’s decision marked a shift to a more cautious period of anti-inflation. Policymakers welcome the recent slowdown in price increases, and the deinflationary trend gives them more room to proceed with caution while making further policy adjustments. But central bankers are concerned that some of today’s inflation may be difficult to eradicate completely, which is preventing them from stopping the offensive altogether.

“We have moved into a new phase of politics,” said Laura Rosner-Warburton, chief economist at MacroPolicy Perspectives. “The Commission is no longer playing catch-up.”

central bankers expected in December That they would raise interest rates to just over 5 per cent in 2023 – meaning two more quarter-point increases after this week’s move – and leave them there for the whole year. Those higher borrowing costs would make it more expensive to finance a car or expand a business, slowing demand and helping to rebalance the economy.

In their statement on Wednesday, officials reiterated that “continued” interest rate increases are likely appropriate. But Mr. Powell said no decisions have been taken yet on rate hikes.

At times, Powell has hinted that the central bank still expects to raise interest rates to just over 5 percent and then leave them there throughout 2023.

“We’re talking about further price increases to get to that level that we think is appropriately constrained,” he said. He later added that he did not expect to cut interest rates this year if the economy performed as expected.

Mr. Powell also noted that he “didn’t feel a lot of certainty” about where the price increases would stop and that they “definitely could be higher”, and said it was difficult to manage the risk of doing too little and inflation popping up again. On the other hand, he said, if the Fed goes too far, it will be easier to deal with.

“The job is not completely done,” he said.

So far, the evidence of labor market moderation in particular remains inconclusive: Initial claims for unemployment benefits remain muted, and the unemployment rate is as low as it has been for half a century. Job vacancies rose in December, and there are now 1.9 jobs available for every unemployed worker.

“The job market continues to be very tight,” Powell said Wednesday. On Friday, the Labor Department will release employment and unemployment numbers for January.

This creates a source of tension for the Fed. Officials always expected prices to begin to cool off as pandemic supply chain issues cleared up and consumers worked through large savings stashes and their spending slowed — and the slowdown is showing. But some policymakers worry that rapid wage growth could keep inflation in services — hotels, restaurants and sporting events — stubbornly higher than it was before the pandemic.

“We’ve seen recognition that the inflation picture is improving, but that doesn’t mean the Fed is about to declare victory over it by any means,” said Sarah House, chief economist at Wells Fargo.

Nor is the global economy as weak as many had expected, with a mild winter easing energy-related woes in Europe and as China reopens from a protracted lockdown. In their statement, Fed officials pointed to the fact that global growth is less at risk than it seemed last year, ignoring the line that the war in Ukraine is ” weighing on global economic activity.”

Instead, Fed policymakers said the war was “contributing to rising global uncertainty.”

Such signs of economic resilience could help the Fed pull back from a soft landing, as it moderates inflation without causing a deep deflation. On the other hand, continued economic strength can support demand and prevent price increases from cooling off enough, if growth proves to be too strong.

Fed officials will focus on where the economy is heading – and how much they think it needs to slow – in the coming months as they determine how high they can raise rates and how long they need to leave them high.

How much the Fed ultimately does will matter to Americans everywhere, as it will help determine how much the unemployment rate will rise this year.

“The risk of a recession is very real at this point,” said Bill English, a former director of monetary affairs at the Federal Reserve who is now a professor at the Yale School of Management. “They’re kind of walking close to the line.”

Beth Ann Bovino, chief economist for the United States and Canada at S&P Global Ratings, said the Fed’s plan to reduce the size of interest rate increases indicated that central bankers were “trying to land the plane safely.”

But, she added, “the impact of cumulative interest rate increases comes with a delay.”

As of last Economic forecastsCentral bankers expected the unemployment rate to rise to 4.4 percent by the end of the year. That would be it 3.5 percent right Now. The central bank will release its next set of economic forecasts in March.

Powell said he believes the Fed will be able to fight inflation without tipping the economy into a painful recession. But he also emphasized that the central bank is committed to restraining price increases, despite the potential cost to growth and the labor market.

He said, “We have to continue the work.” “This is what we are here for.”