The Fed, as expected, raised its key short-term interest rate by a quarter percentage point Wednesday, throttling back from a half-point hike in December and acknowledging that a historic inflation spike is slowing.
“Inflation has eased somewhat but remains elevated,” the Fed said in a statement after a two-day meeting.
The central bank appears reluctant to signal that its aggressive campaign to beat back price increases is nearing an end even as it begins to balance the benefits of the initiative with growing recession risks.
Still, Fed Chair Jerome Powell hinted that could halt its campaign after “a couple more rate hikes.”
In its statement, the Fed repeated that “ongoing (rate) increases…will be appropriate” to bring down yearly inflation to the Fed’s 2% goal. Some economists expected the Fed instead to say “additional increases” would be needed, hinting the Fed is close to winding down the hiking cycle.
At a news conference, Powell said inflation “has moderated but remains too high.”
“We still think there’s work to be done there.” he said. “We haven’t made a decision on exactly where” rates will peak.
What is the Fed interest rate now?
The Fed’s latest move brings the federal funds rate to a range of 4.5% to 4.75%, up from near zero in March, in its boldest flurry of rate increases since the early 1980s.
Powell said the Fed ultimately could stop short of the level officials forecast in December or go beyond it, depending on how rapidly inflation falls. He initially said the central bank would rather err on the side of hiking too much to stamp out high inflation.
“I continue to think that it’s very difficult to manage the risk of doing too little,” he said.
Later, however, Powell signaled that if inflation follows the course officials expect, the Fed is on track to push the Fed’s key rate to the 5% to 5.25% ra ngeand then pause. That would require two more quarter point hikes — in March and May.
“We’re talking about a couple more rate hikes to get to that level that is sufficiently restrictive,” he said,
Wednesday’s hike is expected to further slow economic activity as it drives up rates for credit cards, adjustable rate mortgages and other loans. But Americans, especially seniors, are finally reaping higher bank savings yields after years of meager returns.
In recent weeks, Fed official have noted that inflation has cooled somewhat and another step down to a quarter point rate increase was likely after four straight three-quarter point hikes gave way to December’s half-point move.
Will the Fed continue to raise rates in 2023?
The big question, though, is – How high will the Fed go?
In December, Fed officials’ median estimate had the federal funds rate peaking soon at a range of 5% to 5.25% — a level that some economists believe is likely to tip the U.S. into recession – and staying there the rest of the year.
Markets, however, predict the central bank will pause after bumping the funds rate to 4.75% to 5% in March and begin cutting it by year’s end.
Asked if the Fed could stop before the rate hits 5% to 5.25%, Powell said Wednesday, “Certainly, it’s possible,” depending on inflation and labor market data over the next couple of months. “Absolutely it’s possible.”
“The end of the hikes is in sight,” Ian Shepherdson, chief economist of Pantheon Macroeconomics wrote to clients, adding he believes the Fed will bump up rates, at most, by another quarter point in March.
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