Fed Announces Smaller Rate Hike, Sees More Increases Ahead

Fed Announces Smaller Rate Hike, Sees More Increases Ahead

The Federal Reserve on Wednesday raised its key interest rate by 50 basis points, to a range between 4.25% and 4.5%, the highest level in 15 years. The widely expected move, which comes after four consecutive increases of 75 basis points, confirms that the central bank has seen enough progress in its battle against inflation to begin slowing the pace of rate hikes.

At the same time, Fed Chair Jay Powell said “we still have some ways to go” in the effort to push inflation levels down to the bank’s target rate of 2%. “We’ve taken forceful actions to tighten the stance of monetary policy,” Powell told reporters at a press conference following the announcement. “We’ve covered a lot of ground and the full effects of our rapid tightening so far are yet to be felt. Even so, we have more work to do.”

New projections released by the Federal Open Market Committee show that the central bankers now think that interest rates will go higher than previously expected, with rates hitting an estimated 5.1% at some point in 2023. That means the FOMC expects to raise rates by at least another 75 basis points, with increases likely coming in the first few meetings next year. The last set of projections, released in September, showed that bankers previously thought that rates would top out at 4.6%.

The committee also projects higher inflation levels in the near term, raising its estimate for overall inflation next year to 3.1%, up from 2.8% in its last estimate. Powell warned that “inflation risks are to the upside.”

One potential outcome of the Fed’s continued aggressive stance is that unemployment could rise higher than previously expected. Committee members raised their projection for the unemployment rate in 2023 to 4.6%, with no relief in 2024. “We've made less progress than expected on inflation,” Powell told reporters. “So that's why unemployment goes up, because we're having to tighten policy more.”

The bottom line: Though the pace of rate increases is slowing, Powell reminded everyone that the Fed will continue to tighten its grip on the economy until it is convinced that the inflation rate is returning to a level near 2% – a goal that could take a while to achieve. “We think that we'll have to maintain a restrictive stance of policy for some time,” he said. “Historical experience caution strongly against prematurely loosening policy.”