The Federal Reserve has raised interest rates for the seventh time this year, while signaling that it is moving more cautiously as the U.S. economy slows.
The Fed’s rate-setting committee hiked its benchmark rate by 0.5 percentage point on Wednesday, lifting its target rate into a range between 4.25% and 4.5% — the highest level in 15 years. The federal funds rate affects the cost of borrowing for consumers and businesses throughout the economy.
The half-percentage-point increase marks a step-down from a string of bigger interest rate hikes this summer, when the Fed made four consecutive 0.75% jumps in an effort to curb the most ferocious bout of inflation in four decades.
In a nearly identical statement to the one it issued last month, the Fed said the economy is seeing “modest” growth and that inflation “remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.”
Notably, policymakers indicated they plan to keep raising rates, but suggested they would proceed more slowly than this year.
“We are seeing the effects on demand in the most interest-sensitive sectors of the economy such as housing. It will take time, however, for the full effects of monetary restraint to be realized, especially on inflation,” Fed Chair Jerome Powell told reporters on Wednesday. He added, “We still have some ways to go.”
Not easing up
Stock markets had risen earlier this week on the expectation that the worst of the Fed’s rate increases were over. But stocks fell on Wednesday after Powell emphasized on Wednesday that the central bank plans to keep hiking rates, if more slowly, to counterbalance what he sees as a historically tight labor market.
“We may have to raise rates higher to go where we want to go. That’s why we’re running down the high rates and why we’re expecting they’ll have to remain high for a time,” he said.
The Fed expects interest rates to rise to between 5.1% and 5.4% next year — near the level they were in 2006.
“As for the future course of policy, officials now expect a higher peak funds rate next year to be followed by rate cuts in 2024 and 2025,” Rubeela Farooqi, chief U.S. economist with High Frequency Economics, said in a report. “The Fed has now moved to phase two of its rate hiking cycle, shifting from a front-loading approach to a slower pace of rate increases until rates are in a sufficiently restrictive stance.”
“Stagflation” ahead?
The Fed’s assessment of the economy has worsened in recent months. It now expects anemic economic growth next year of just 0.5% and predicts that unemployment will hit 4.6%, up from its current rate of 3.7%. The Fed also expects inflation to stay higher longer, with its preferred gauge of price increases, personal consumption expenditures, staying at 3.1% next year.
“[T]he combination of lower GDP and higher inflation signals stagflation,” Adam Crisafulli of Vital Knowledge said in a note.
The Consumer Price Index — a closely watched inflation gauge — fell to 7.1% in November from a year ago, led by a decline in energy, commodity and used car prices, the Labor Department reported Tuesday. That reading was down from a peak of 9% in June, propelled by soaring fuel costs.
Still, 7.1% is far above the Fed’s target of 2% inflation, and Powell emphasized that the Fed plans to keep hiking rates for the foreseeable future, even if it leads to an economic crunch and higher unemployment.
“Reducing inflation is likely to require a sustained period of below trend growth and some softening of labor market conditions,” he said. “We’ll stay the course until the job is done.”
