Fed finally backs off 75-bps hikes with December rate increase

The Federal Reserve raised its benchmark interest rate by half a percentage point on Wednesday, a widely expected move that put a stop to four straight hikes of 75 basis points (bps) and signaled that inflation may finally be beginning to cool.

The increase still moved the Fed’s policy rate to a range of 4.25 to 4.5%, the highest it has been since 2007. And while the Fed eased off slightly from its recent hawkishness in using interest rates to combat inflation, it reiterated that it would continue to be both vigilant and diligent in using its tools to stay on the offensive, even with the turbulence its aggressive moves have helped to stir up.

“I’d like to underscore for the American people that we understand the hardship that inflation is causing,” Fed Chair Jerome Powell said following Wednesday’s meeting of the central bank’s Federal Open Market Committee (FOMC).

Powell made it clear, however, that the Fed will continue to wield the tools in its arsenal to rein in stubborn inflation.

“We have more work to do,” he said. “Reducing inflation is likely to require a sustained period of below-trend growth and some softening of labor-market conditions.

“We are seeing the effects [of Federal Reserve interest rate hikes] on demand in the most interest-sensitive sectors of the economy, such as housing. It will take time, however, for the full effects of monetary restraint to be realized, especially on inflation.”

Powell acknowledged that some factors, such as normalizing consumer demand and supply chain progress, are helping to quell inflation. But other headwinds, including strong wage growth, are still fueling the rampant rise of prices.

Indeed, the statement released by the FOMC pointed to “ongoing increases in the target range” in order to bring inflation back to the Fed’s 2% target. New economic projections issued Wednesday by the central bank revealed that officials now anticipate inflation to close this year at 4.8%, gradually dwindling back to 3.5% in 2023 and falling to 2.5% in 2024.

Federal Reserve projections also foresee the benchmark rate peaking at 5.1% next year, up 50 bps from its most recent forecast of 4.6% in September. Furthermore, the forecasts have rates settling to 4.1% in 2024, somewhat higher than prior predictions. The Fed’s statement also indicated that it will continue to reduce its debt holdings (including agency mortgage-backed securities) at its current pace.


More Headlines