The Federal Reserve is moving slowly but steadily upward.
The Federal Reserve raised its key short-term interest rate by half a percentage point on Wednesday, reversing recent large hikes as it plans an end game in its aggressive campaign to tame soaring inflation.
However, the central bank expects another three-quarter point increase in interest rates next year, which is higher than previously estimated. Fed officials are thus signalling that they believe inflation is still too high and will not relent in their hard-fought battle to bring it down, despite growing recessionary risks.
Following a two-day meeting, the Fed reiterated that “ongoing (rate) increases…will be appropriate” to bring yearly inflation down to the Fed’s 2% target. Some economists predicted that the Fed would instead say “additional increases” would be required, indicating that the Fed is nearing the end of its hiking cycle.
Fed Chair Jerome Powell said at a news conference that recent reports showing inflation easing in October and November were “welcome.”
“The report is exactly what we hoped for and expected,” he said.
But he added, “It will take substantially more evidence to provide confidence that inflation is on a sustained downward path.” He stated that the Fed is expecting several such reports that show steadily easing price gains.
How much did the Fed raise interest rates today?
The Fed’s latest move comes after four consecutive three-quarter point increases, bringing the federal funds rate – what banks charge each other for overnight loans – to a range of 4.25% to 4.5%, a restrictive level intended to slow economic growth.
The increase is expected to have a knock-on effect on the economy, raising interest rates on credit cards, home equity lines of credit, adjustable rate mortgages, and other loans. However, after years of poor returns, Americans, particularly seniors, are finally benefiting from higher bank savings yields.
According to policymakers’ median forecast, the Fed now expects the rate to end 2023 at a range of 5% to 5.25%, up from 4.5% to 4.75% in September. It estimates it will cut the rate to 4.1% by the end of 2024 to support an economy likely to be weakened by the rate increases, above the 3.9% it predicted in September.
According to Wolters Kluwer Blue Chip Economic Indicators, the majority of economists expect a mild recession next year.
Economists are sceptical that the Fed will need to raise interest rates as much as it is projecting.
“We believe a slowing economy and progress on inflation will allow the Fed to stop short of that forecast,” Oxford Economics economist Nancy Vanden Houten wrote in a client note.
According to officials’ median estimate, the Fed expects the economy to grow 0.5% this year, up from 0.5% previously estimated, and at the same slow pace in 2023, down from 1.2% in September.