As widely predicted, the Federal Reserve Bank approved another interest rate increase following its December meeting, although at a slower rate than the four previous hikes. Rates increased by 50 bps, raising the benchmark Federal Funds rate to a range between 4.25% and 4.5%, a 15-year high.
The Fed decision comes in the wake of the Labor Department’s release of its Consumer Price Index (CPI), a measurement of what consumers pay for goods and services. The CPI indicated that US prices climbed 7.1% in November from a year ago, down sharply from 7.7% in October. The so-called Core CPI, which excludes volatile energy and food prices, rose 6% in November from a year ago, easing from a 6.3% gain in October.
Walking a Tightrope
Fed policymakers appear to be entering a new phase of policy tightening as they carefully balance between increasing interest rates too much at the risk of damaging the economy and stopping their efforts to slow down inflation too early.
During the press conference following the Fed’s decision, Federal Reserve Chair Jerome Powell reiterated that the institution does not intend to reverse its course before inflation hits its targeted rate of 2%. “We still have some ways to go,” he said. “We will stay the course until the job is done,” before adding, “I wouldn’t see us considering rate cuts until the committee is confident that inflation is moving down to 2% in a sustained way. Restoring price stability will likely require maintaining a restrictive policy stance for some time.”
The US job market is still going strong, slowing down the inflation decline. Employers added 263,000 jobs in November, while the jobless rate remained at 3.7% last month, a historically low level that is pushing up wages. Wage increases are currently running about 5% per year, which Powell considers to be too high for inflation to decline to its targeted rate. “I wish there were a completely painless way to restore price stability,” Powell said. “There isn’t.”
Please note this update will be on hiatus for the next two weeks with publication resuming on January 6. We hope your holidays are very enjoyable and that the new year will mark the beginning of a happy, healthy, and prosperous 2023!
