On Wednesday, the Federal Reserve hiked the benchmark interest rates by half a percentage point to a range of 4.25 to 4.5 percent, the highest in 15 years.
This hike size was smaller than the previous one at 75 basis points. The hike, nevertheless, will still increase consumer costs and business loans. Analysts have also said that aggressively hiking interest rates can heighten the risk of a recession.
Fed chairman Jerome Powell addressed the public after the rate-setting meeting, saying that despite the smaller hike size, the central bank would increase the rate further into 2023.
Policymakers predict that the federal funds rate will hit a range of 5.0 to 5.25 percent by the end of next year, suggesting that the central bank will maintain the high rate throughout the year after raising the interest rate by an additional 75 basis points.
Like other central banks, the U.S. uses interest rate hikes to tame inflation. The country's annual target inflation is two percent, but it faced the highest inflation rate in decades after the COVID-19 pandemic.
The November consumer price index (CPI), released before the rate-setting meeting, showed a decrease in the pace of inflation in the U.S. for the fifth consecutive month. The year-over-year increase in consumer prices was 7.1 percent, a significant drop compared to the 9.1 percent rate in June.
“The inflation data in October and November show a welcome reduction,” Powell said. “But it will take substantially more evidence to give confidence that inflation is on a sustained downward path.”
Fed officials said the market had shown signs of improvement, including a reduction in gas prices. Supply chains in numerous sectors have also solved its clogging issue, which further helps lower prices. In November, data also showed a decline in used cars, toys and furniture prices.
Powell also disclosed the central bank’s forecasts of the U.S. economy in 2023. The Fed predicted that the economy would grow slower, by around 0.5 percent. It also projected a spike in the unemployment rate to 4.6 percent by the end of next year. Powell added that the situation might continue in 2024.
"Over the course of the year, we have taken forceful actions to tighten the stance of monetary policy,"
Jerome Powell, chair of the Federal Reserve
Asked whether the Fed will further reduce the hike size in upcoming FOMC meetings, Powell said the policymakers had yet to decide on the next hike size. Powell explained that since the central bank tightened the monetary policy at a fast rate, it believed “the appropriate thing to do now is to move at a slower pace.” He added that the officials would not cut the benchmark interest rate until they were confident that the decrease in inflation pace was sustainable.
In previous statements, Powell said the agency’s focus was to stabilize prices. He insisted that his biggest focus was on service prices, which would likely remain high in the future. Analysts said wage inflation was the main contributor to inflation in the services sector.
Powell also said that the public should focus more on the terminal interest rate when the Fed concluded this monetary tightening cycle. How long the central bank will maintain the high-interest rate largely depends on inflation.
Inflation in Europe, U.K.
Data show that the inflation pressures in Europe and the U.K. have eased slightly. European countries saw declines in inflation starting in October when the year-over-year rate fell to ten percent. Inflation in the U.K. also fell to 10.7 percent in November.
Analysts expect the European Central Bank and the Bank of England to reduce their hike sizes to 50 basis points. Previously, both central banks raised the interest rate by 75 basis points in respective regions. Both regions have exceeded the initial interest rate target of two percent.