US Fed unveils smaller rate hike but signals inflation fight not over

• The US central bank raised the benchmark lending rate by a quarter point.
• The target range will be of 4.50–4.75%
• The Fed has increased interest rates eight times.

WASHINGTON: The Federal Reserve of the US dialed back the rate of interest rate increases on Wednesday, easing an aggressive drive to contain costs as inflation slows, but signaling that the fight is far from done.

At the conclusion of its two-day policy meeting, the US central bank raised the benchmark lending rate by a quarter point, bringing it to a target range of 4.50–4.75%.

The Federal Open Market Committee (FOMC), which determines the Fed’s policy, declared in a statement that inflation “has moderated somewhat but remains elevated.”

While recent developments are positive, authorities will need “much more data,” according to Fed Chair Jerome Powell, in order to be certain that inflation is on a persistent downward path.

The FOMC statement claims that in order to get inflation back to where policymakers want it to be, 2%, “the committee anticipates that continuing increases in the target range will be prudent.”

Since March 2022, the Fed has increased interest rates eight times, four times in a row by 0.75 percentage points, in an effort to reduce demand.

The goal is to slow down inflation, which peaked last year but has already started to decline at its quickest rate in decades.

As economic activity slows, the Fed noted on Wednesday that recent data “point to modest growth in expenditure and production.”

The 0.25 percentage point increase is a decrease from the half-point increase in December and the string of higher increases last year.

However, the FOMC’s statement implies that rate increases will go on.

Powell stated on Wednesday that a few more rate increases will be necessary to reach an “appropriately restrictive” level of policy while inflation is high.

And under current expectations, it “will not be appropriate to cut rates this year,” he said.

Pushing back

“The Fed is pushing back against market expectations that rate cuts are coming,” said Ryan Sweet, chief US economist at Oxford Economics.

“The central bank is clearly signaling that it will err on the side of doing too much than too little to tame inflation,” Sweet said.

In the second quarter of this year, he anticipates the onset of a policy-induced recession.

There is a significant probability of positive growth in 2023 because of the robust labor market, declining inflation, and upcoming public and private spending to stimulate economic activity, according to Powell.

A gauge of pay and benefits increased less than anticipated in the fourth quarter of last year, according to statistics that were revealed on Tuesday.

Private hiring slowed more than expected in January, according to data released on Wednesday by payroll company ADP, adding to indications that the economy is slowing.

End in sight

Pantheon Macroeconomics chief economist, An Shepherdson, thinks rate increases are about to come to a halt.

If the Fed raises rates once more in March, he anticipates that it “won’t be going again in May.”

He expressed worry, though, that policymakers would be “so committed to the idea of hiking rates again that they will require disproportionately strong evidence to persuade them to halt.”

Officials have made it clear that they intend to stick with their plan.

Markets initially welcomed the Fed’s change in tone as it highlighted the reduction in costs, according to Shepherdson.

Wall Street stocks ended higher, as Powell struck a less confrontational tone than what analysts expected after the rate hike.

Looking ahead, “services inflation, primarily a function of wage growth, will dictate the path of inflation in 2023,” said Moody’s Analytics economist Matt Colyar.

“While wage growth showed signs of moderation in the final three months of 2022… it would be premature for the Fed to declare victory,” he said

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