With consumer prices cooling, the Federal Reserve continued to roll back its interest rate policy and lifted its benchmark rate by 25 basis points to a target of 4.5% to 4.75%.
The central bank announced the change after Wednesday’s meeting of the Federal Open Market Committee (FOMC), which is responsible for setting national fiscal policy. The new target range is the highest level set by the Fed since 2007.
The latest rate hike is the Fed’s eighth consecutive anchor rate increase — and in all likelihood not its last. A statement released after the FOMC meeting indicated that “ongoing rate increases … will be appropriate” to further corral inflation, which the Fed said “has eased somewhat but remains elevated.” The announcement disappointed some market observers, who were hopeful that the Fed would signal no more rate increases moving forward.
“We think we’ve covered a lot of ground and financial conditions have certainly tightened,” Federal Reserve Chair Jerome Powell said at a post-meeting press conference. “I would say we still think there’s work to do there. We haven’t made a decision on exactly where that will be. I think we’re going to be looking carefully at the incoming data between now and the March meeting, and then the May meeting.”
Still, it’s the second consecutive pullback when it comes to the size of the Fed’s rate increase, coming after the Reserve raised rates by 50 basis points in December. The 25-bps increase is the smallest increase to the federal funds rate since March 2022.
“Today’s more moderate rate increase is a clear signal to markets that, while the Fed may need to raise rates somewhat higher this year, it is getting closer to its terminal rate in this rate cycle as inflationary pressures continue to ease,” said Marty Green, principal at mortgage law firm Polunsky Beitel Green.
Wells Fargo economist Jay H. Bryson projected that the FOMC will raise its benchmark rate by another 25 bps at each of its next two policy meetings.
“That said, we do not have a high level of conviction regarding the exact amount of tightening that the committee will need to deliver,” Bryson wrote in Wells Fargo commentary. “The committee is in the fine-tuning stage of its tightening cycle, and the number of remaining rate hikes will depend on incoming economic data in coming weeks and months. We have a higher degree of conviction, however, in our belief that the FOMC will not be quick to ease policy.
“Committee members appear to be united in their view that inflation remains too high, and that policy will need to be restrictive in order to bring inflation back to the FOMC’s target of 2% on a sustained basis. … In that regard, we do not look for rate cuts to begin until early 2024.”