Fed lifts rate by quarter-point but says inflation is easing
The Federal Reserve extended its fight against high inflation Wednesday by raising its key interest rate by a quarter-point, its eighth hike since March. And the Fed signaled that even though inflation is easing, it remains high enough to require further rate hikes.
At the same time, Chair Jerome Powell said at a news conference that the Fed recognizes that the pace of inflation has cooled — a signal that it could be nearing the end of its rate increases. The stock and bond markets rallied during his news conference, suggesting that they anticipate a forthcoming pause in the Fed's credit tightening.
Throughout his remarks Wednesday, Powell sounded a dual message. He frequently acknowledged signs that high inflation is slowing.
“We can now say I think for the first time,” he said, “that the disinflationary process has started.”
Yet he also stressed that it was too soon to declare victory over the worst inflation bout in four decades: “We will need substantially more evidence to be confident that inflation is on a long, sustained downward path.”
The Fed's rate increase Wednesday, though smaller than its half-point hike in December — and even larger rate increases before that — will likely further raise the costs of many consumer and business loans and the risk of a recession.
In a statement, Fed officials repeated language they've used before that says, “ongoing increases in the (interest rate) target range will be appropriate.” That is widely interpreted to mean they will raise their benchmark rate again when they next meet in March and perhaps in May as well.
The Fed chair said that so far, much of the inflation slowdown reflects the prices of goods, notably gas but also furniture, appliances and other finished products that have benefited from an unraveling of supply chain snarls.
But Powell reiterated his concern that prices for services — restaurant meals, health care, airline tickets and the like — are still surging. He has said he pays particular attention to services prices because they are labor-intensive.
As a result, robust wage gains can keep services prices elevated and perpetuate high inflation.
The central bank's benchmark rate is now in a range of 4.5% to 4.75%, its highest level in 15 years. Powell appeared to suggest Wednesday that he foresees two additional quarter-point rate hikes:
“We're talking about a couple of more rate hikes to get to that level we think is appropriately restrictive,” he said, referring to rates high enough to slow the economy.
Yet Wall Street investors have priced in only one more hike. Collectively, in fact, they expect the Fed to reverse course and actually cut rates by the end of this year. That optimism has helped drive stock prices up and bond yields down, easing credit and pushing in the opposite
direction that the Fed would prefer.
Last summer, Powell took the opportunity in a high-profile speech in Jackson Hole, Wyoming, to push back against market expectations of rate cuts anytime soon. His speech hammered home the Fed's intent to keep raising rates — even if it caused “pain” in the form of slower growth and higher unemployment.
On Wednesday, though, Powell declined an opportunity to defuse the market's buoyant expectations.
“Our focus,” he said, “is not on short-term moves but on sustained changes” in financial markets.
He noted instead that some financial gauges, like mortgage rates, are much higher than they were when the Fed began raising rates.