The Federal Reserve issued its final rate hike of the year but signaled more would follow in 2023 as the Fed continues its response to inflation.
The Federal Reserve on Wednesday increased interest rates by 0.5 percentage points, raising its benchmark rate to 4.25-4.50%, the highest level in over a decade.
Following the 0.50% increase, Federal Reserve Chairman Jerome Powell reiterated at a press conference that ongoing increases would be appropriate to bring down inflation to the Fed’s 2% goal.
“I wouldn’t see the committee cutting rates until we’re confident that inflation is moving down in a sustained way,” said Powell.
“The inflation data received so far for October and November show a welcome reduction in the monthly pace of price increases, but it will take substantially more evidence to give confidence that inflation is on a sustained downward path,” Powell said at a press conference.
Despite promising signs that inflation is starting to ease, Powell suggested the fight was far from over.
“The report is very much what we expected and hoped for,” but “it will take substantially more evidence to provide confidence that inflation is on a sustained downward path,” he said.
The annual inflation rate in the U.S. slowed for a fifth straight month to 7.1% in November, the lowest since December last year and below consensus estimates of 7.3%, according to Trading Economics and backed by the Bureau of Labor Statistics’ monthly CPI report. Inflation in the U.S. reached its highest level of 2022 in June, with a 9.1% CPI reading — a 40-year high.
Some economists see additional rate hikes in 2023 as a grim sign for consumers.
“The Federal Reserve has raised to levels this year that didn’t fit on the Summary of Economic Projections y-axis scale nine months ago. Today, the FOMC (Federal Open Market Committee) projected raising rates next year to levels that didn’t fit on the Sep y-axis six months ago,” tweeted Nick Timiraos, chief economics correspondent for The Wall Street Journal.
The Fed has issued a record-breaking and historic spree of interest rakes hikes in 2022, with a total of seven rate hikes. The Fed raised rates twice in the first half of the year, 0.25% and 0.50%, respectively. The latter half of the year got five rate hikes, four consecutive 0.75% rate hikes in June, July, September, and November, and a final 0.50% in December.
The Fed now expects the rate in 2023 to end within a range of 5% to 5.25%. No rate cuts are projected for next year, but estimates by economists are that the Fed will cut the rate to 4.1% by the end of 2024, according to policymakers’ forecast for the next two years.
“We think a slowing economy and progress on inflation will allow the Fed to stop short of that forecast,” Oxford Economics Economist Nancy Vaden Houten said in a note to clients.
The Federal Open Market Committee meeting schedule for 2023 can be found here.