The Federal Reserve is taking its foot off the brake a little more.
However, it seems ill-prepared to press the economy’s gas pedal.
As anticipated, the Fed increased its benchmark short-term interest rate by a quarter of a percentage point on Wednesday, reversing a half-point increase in December and recognizing a historic inflation spike is fading.
After a two-day meeting, the Fed issued a statement that claimed: “inflation has moderated somewhat but remains elevated.”
Even as it starts to weigh the advantages of the program against rising recession risks, the central bank looks reluctant to indicate that its robust battle to thwart price increases is about to come to an end.
However, Fed Chair Jerome Powell said it might end its campaign after “a few more days.”
The Fed reiterated in its statement that “ongoing (rate) increases…will be appropriate” to lower annual inflation to the Fed’s target of 2%. Some economists anticipated the Fed to indicate “further rises” would be required, implying the Fed is about to end the cycle of rate hikes.
Powell stated during a press briefing that inflation “has eased but remains too high.”
We still believe that needs to be worked on, he added. Rates won’t peak “exactly where,” according to us.
Fed interest rate: what is it at the moment?
The Federal Reserve’s most audacious round of rate rises since the early 1980s has seen the federal funds rate rise from nearly zero in March to a range of 4.5% to 4.75% as of the most recent Fed action.
Powell stated that depending on how quickly inflation declines, the Fed may eventually stop short of the level experts predicted in December or go beyond it. He initially claimed that in order to combat high inflation, the central bank would rather err on the side of raising rates excessively.
He remarked, “I still believe that managing the danger of doing too little is quite tough.
Later, though, Powell gave a hint that the Fed is on track to raise its benchmark interest rate to the 5% to 5.25% range and then pause if inflation proceeds as expected. Two additional quarter-point increases would be necessary, in March and May.
He said that we’re discussing a couple more rate increases to reach that suitably restricted level.
The increase on Wednesday is anticipated to further hamper economic activity by raising interest rates on loans like as credit cards and adjustable-rate mortgages. But after years of paltry returns, Americans, particularly seniors, are finally reaping higher bank savings yields.
Since four consecutive three-quarter-point rate hikes gave way to December’s half-point increase, Fed officials have remarked that inflation has moderated considerably and that another step down to a quarter-point rate increase is possible.
In 2023, will the Fed continue to raise rates?
But the crucial query is: How high will the Fed go?
The federal funds rate was expected to peak in the near future in a range of 5% to 5.25%, which some economists fear is likely to push the United States into recession, and stay there for the remainder of the year, according to the median estimate of Fed officials in December.
The central bank is expected to pause after raising the fund’s rate to 4.75% to 5% in March and lowering it by year’s end, according to the markets.
When asked if the Fed could stop before the rate reached 5% to 5.25%, Powell responded on Wednesday, “Certainly, it’s possible,” depending on the outcome of the upcoming months’ inflation and labor market indicators. “Unquestionably that is doable.”
The Fed will only raise rates by another quarter point in March, according to Pantheon Macroeconomics Chief Economist Ian Shepherdson, who wrote to clients that “the end of the rises is in sight.”
As the economy deteriorates, Powell discounted the likelihood of a rate drop in 2023. I don’t see us decreasing rates this year, given our expectations, he added, adding that this might change if inflation slows down more swiftly than anticipated.
Will inflation decrease?
Recent reports have given Fed officials who favor easing its stance some ammunition. The rate of inflation has decreased faster than expected, from a 40-year high of 9.1% in June to 6.5% in December, down from 7.1% in the previous month.
The economy is also starting to slow down. From 366,000 jobs added in the previous quarter, job growth has slowed to a still-strong average monthly rate of 247,000 over the last three months. Furthermore, late last year saw a decline in company investment and retail sales.
Powell, though, has stated that the central bank won’t stop raising rates until it gets evidence that wage growth is slowing in service sectors like healthcare, education, and dining. According to him, such sectors’ price rises account for the majority of inflation.
“We will need substantially more evidence to be confident inflation is on a sustained downward path,” Powell said Wednesday.