The Federal Reserve enacted its smallest interest rate hike in nearly a year on Wednesday — but signaled it expects “ongoing increases” in a blow to investors calling for a pause in the bank’s inflation-fighting campaign.
The rate-making Federal Open Market Committee hiked its benchmark rate by a quarter percentage point — to a range of 4.5% to 4.75% — at the conclusion of its two-day policy meeting.
“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 percent over time,” the FOMC said in a statement.
The increase marked the eighth consecutive hike dating to March of last year.
However, the quarter-point hike was the smallest since the Fed began its current policy-tightening effort and followed a series of supercharged hikes — including one in December.
During a post-meeting press conference, Fed Chair Jerome Powell said policymakers could say “for the first time” that the “disinflationary process has started” following last year’s rapid rate hikes.
At the same time, Powell noted the Fed would need “substantially more evidence” that inflation was “on a sustained downward path. He added that the risks of tightening too aggressively were less than the risk of not doing enough to curb prices.
“We have no incentive and no desire to overtighten, but if we feel like we’ve gone too far and inflation is coming down faster than we expect, then we have tools that would work on that,” Powell said.
Powell’s remarks stoked optimism among investors, with stocks paring earlier losses and turning positive during his press conference. The tech-heavy Nasdaq and the broad-based S&P 500 rose 2% and 1.1%, respectively. The Dow Jones Industrial Average, which had been down more than 500 points, edged up 6.92 points.
Powell and his colleagues are in the midst of a high-wire attempt to bring inflation back to normal levels, despite mounting concerns among investors that their efforts will prompt a severe recession.
The Fed will release updated projections for its expected policy path at its next meeting in March.
The Fed’s latest move was in line with the market’s expectations. Just hours before the Fed’s announcement, investors were pricing in a 99.3% probability that officials would hike the benchmark rate by a quarter-point and a 0.7% chance that officials would leave the rate unchanged, according to CME Group data.
Projections released in December signaled the Fed would hike rates above 5% this year — well into restrictive territory — and keep them level for the foreseeable future to ensure that inflation was fully tamed.
Powell has cited concerns based on past instances in which the Fed eased policy too soon and caused more economic trouble.
In recent remarks, top Fed officials have noted progress on the inflation front even as they reiterated that more concrete evidence was needed.
“Even with the recent moderation, inflation remains high, and policy will need to be sufficiently restrictive for some time to make sure inflation returns to 2% on a sustained basis,” Fed vice chair Lael Brainard said earlier this month.
Policymakers received a positive sign last week after the Fed’s preferred inflation gauge, the PCE Index, cooled to 5.5% in December. Prices have fallen steadily in recent months, but are still running well above the Fed’s 2% target and causing budget problems for US households.
“Inflation pressures are easing and investors are expecting the Fed will soon move to the sidelines rather than push interest rates above 5% in the months ahead,” said Bankrate chief financial analyst Greg McBride.
At the same time, federal data showed personal spending adjusted for inflation fell by 0.3% in December — a sign that consumers are cutting back on purchases in a potentially worrying sign for the economy.
Bill Adams, chief economist for Comerica Bank, said the Fed will “probably make one more quarter-percentage-point rate hike” in March — though the final decision will depend on incoming economic data.
“If the labor market data deteriorate significantly over the next few weeks, the Fed could take a pass on that March rate hike; on the other hand, jobs data could prove more resilient than expected and the Fed could make a third quarter-percentage-point rate hike in May before moving to the sidelines,” Adams said.
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