Federal Reserve hikes interest rates by 0.50% in final meeting of 2022

The Federal Reserve hiked short-term interest rates by 0.50% on Wednesday, taking interest rates to their highest level since 2007 while hinting at further rate hikes in 2023.

Wednesday’s move brings the Fed’s benchmark interest rate to a range of 4.25% to 4.5%, capping a year in which the central bank hiked rates by a total of 4.25%.

Wednesday’s 50 basis point rate hike marked a slowdown in the Fed’s recent pace of rate hikes, as the central bank had hiked rates by 75 basis points in each of its last four policy meetings – the most aggressive streak since the 1980s.

“Throughout the year we took vigorous action to tighten monetary policy,” Fed Chair Jerome Powell said on Wednesday. “We have achieved a lot and the full impact of our rapid tightening has yet to be felt. Nevertheless, we still have more to do.”

In its statement announcing Wednesday’s move, the central bank added language saying it expects “continued hikes” in interest rates, suggesting the Fed has no intention of halting rate hikes immediately.

“The committee believes that continued increases in the target range will be appropriate to achieve monetary policy sufficiently restrictive to bring inflation back to 2 percent over time,” the Fed’s statement said.

New Fed economic forecasts released on Wednesday show officials now expect interest rates to peak in 2023 at 5.1%, another 50 basis points higher than the 4.6% previously forecast in September. Officials then see interest rates falling to 4.1% in 2024, slightly higher than previously forecast.

These forecasts come after Fed Chair Jerome Powell said at the last meeting that rates need to rise higher than previous forecasts in September.

Seven officials expect rates to rise more than 5% next year – with five clustering around 5.25% and two seeing a peak of 5.6% next year.

Officials expect core inflation to fall back close to target by 2024, with inflation rounding out at 4.8% this year before falling to 3.5% next year and 2.5% in 2024.

Jerome Powell, Chairman of the Federal Reserve Board, delivers a news conference following the announcement that the Federal Reserve has raised interest rates by half a percentage point, at the Federal Reserve Building in Washington, the United States, December 14, 2022.  REUTERS/Evelyn Hockstein

Jerome Powell, Chairman of the Federal Reserve Board, delivers a news conference following the announcement that the Federal Reserve has raised interest rates by half a percentage point, at the Federal Reserve Building in Washington, the United States, December 14, 2022. REUTERS/Evelyn Hockstein

Officials expect unemployment to rise to 4.6% next year and stay at that level through 2024. The Fed sees below-average economic growth, with the economy barely growing at just 0.5% next year before picking up slightly to 1.6% in 2024.

When asked during a news briefing Wednesday whether those projections — with growth slowing and unemployment rising — suggest the Fed would tolerate the economy sliding into a recession, Powell said, “I don’t think it would count as a recession , because you have it positive [GDP] Growth.”

The Fed’s move comes as inflation began to show signs of slowing over the past two months after hitting a 40-year high this spring. The CPI, excluding the more volatile food and energy components, rose 0.2%m/m in November, compared to 0.3% in October and 0.6% in September and August.

“Inflation data received so far for October and November shows a welcome slowdown in the monthly pace of price increases,” Powell said. “But far more evidence is needed to inspire confidence that inflation is on a sustained downward path.”

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