US Fed unveils smaller rate hike but signals inflation fight not over

WASHINGTON, United States (AFP) – America's Federal Reserve slowed its pace of interest rate hikes Wednesday, tempering an aggressive campaign to rein in costs as inflation cools, but signaled the battle is not yet over.

The US central bank announced a quarter-point hike to the benchmark lending rate at the end of its two-day policy meeting, taking the rate to a target range of 4.504.75 percent.

"Inflation has eased somewhat but remains elevated," said the Fed's policy-setting Federal Open Market Committee (FOMC) in a statement.

While recent developments are encouraging, officials will need "substantially more evidence" to be confident that inflation is on a sustained downward path, Fed Chair Jerome Powell told a press briefing.

According to the FOMC statement, "the committee anticipates that ongoing increases in the target range will be appropriate" to bring inflation back to policymakers' two percent target.

The Fed has cranked up interest rates eight times since March 2022, including four consecutive 0.75 percentage point increases, lifting borrowing costs in hopes of dampening demand.

The aim is to rein in inflation, which surged to its fastest pace in decades last year but has since come off a peak.

On Wednesday, the Fed acknowledged recent indicators "point to modest growth in spending and production" as economic activity eases.

The 0.25 percentage point rise marks a step down from December's half-point hike and the series of bigger spikes last year.

But the FOMC statement suggests rate increases will continue.

Powell noted Wednesday that it will take a few more rate hikes to get to an "appropriately restrictive" policy level while inflation runs hot.

And under current expectations, it "will not be appropriate to cut rates this year," he said.

The Fed also stressed that officials are "highly attentive to inflation risks" amid fallout from Russia's war against Ukraine, which is contributing to greater global uncertainty.

"The Fed is pushing back against market expectations that rate cuts are coming," said Ryan Sweet, chief US economist at Oxford Economics.

"The central bank is clearly signaling that it will err on the side of doing too much than too little to tame inflation," Sweet said.

He expects a policy-induced recession to start in the second quarter this year.

But Powell told reporters that growth will continue, though at a "fairly subdued level this year."

With a strong labor market, fading inflation, as well as public and private spending in the pipeline to support economic activity, there is a good chance of positive growth in 2023, Powell said.

For now, data released Tuesday showed that a measure of pay and benefits rose less than expected in the fourth quarter last year.