As widely expected, the Federal Reserve Bank announced another interest rate increase of a quarter point after its latest meeting, bringing the federal fund rate to a target range of 4.5% to 4.75%, the highest since October 2007.
This is the eighth consecutive rise of its kind since the Fed initiated an aggressive monetary policy as its primary means to fight against inflation, which reached a 40-year high in June 2022. However, the latest increase marks a departure from previous larger rate hikes. “We can now say for the first time that the disinflationary process has started,” said Fed Chairman Jerome Powell in his post-meeting news conference. “This is a good thing.”
Despite encouraging numbers, the Fed remains cautious. “Inflation data received over the past three months shows a welcome reduction in the monthly pace of increases. And while recent developments are encouraging, we will need substantially more evidence to be confident that inflation is on a sustained downward path,” declared Powell.
According to the latest Consumer Price Index for All Urban Consumers (CPI-U), inflation rose at its slowest pace since October 2021 in December, with prices for goods and services rising by 6.5% in year-over-year comparisons. Although this represents a significant improvement compared to its 9.1% peak, it is still a ways away from the Fed’s targeted 2% rate.
More Interest Rate Hikes to Come?
The Fed is leaving the door open to additional interest rate increases following its upcoming meetings in March and May. “The committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time,” the Fed said in a statement issued after the policymaking meeting, repeating language it has used in previous communications.
The labor market, which remains extremely tight despite recent high-profile layoffs, continues to be a source of concern for Powell. The Fed chair does not anticipate inflation to cool down to its targeted rate until the job market softens.
“Certainty is just not appropriate here,” said Mr. Powell. “I’m not going to try to persuade people to have a different forecast, but our forecast is that it will take some time and some patience, and that we’ll need to keep rates higher for longer.”
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