Fed lifts rate by quarter-point and signals more hikes ahead
WASHINGTON >> 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 eased — a signal that it could be nearing the end of its rate hikes. The stock and bond markets rallied during his news conference, suggesting that they anticipate a forthcoming pause in the Fed’s credit tightening.
The Fed’s latest move, though smaller than its previous hike — 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’s hike was announced a day after the government said pay and benefits for America’s workers grew more slowly in the final three months of 2022, the third straight slowdown. That report could help reassure the Fed that wage gains won’t accelerate inflation.
Though the Fed kept language in its statement Wednesday suggesting that more rate hikes are in store, it did note for the first time that price pressures are cooling. The statement also hinted that it will likely stick with modest quarter-point hikes in coming months and is considering when to eventually suspend them altogether.
Powell stressed that the Fed’s inflation fight is far from over.
“We will need substantially more evidence to be confident that inflation is on a long, sustained downward path, he said at his news conference. “It would be very premature to declare victory or think that we really got this. We have to complete the job.”
Speculation is widespread, though, among Wall Street investors and many economists that with inflation continuing to cool, the Fed may soon decide to halt its aggressive drive to tighten credit. When they last met in December, the Fed’s policymakers forecast that they would eventually raise their benchmark rate to a level that would require two additional quarter-point hikes.
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.
The divide between the Fed and financial markets is important because rate hikes need to work through markets to affect the economy. The Fed directly controls its key short-term rate. But it has only indirect control over borrowing rates that people and businesses actually pay — for mortgages, corporate bonds, auto loans and many others.
The consequences can be seen in housing. The average fixed rate on a 30year mortgage soared after the Fed first began hiking