The Federal Reserve announces a slower pace of interest rate hikes as inflation slows

Amid signs that price growth in the US economy is slowing rapidly, the Federal Reserve announced on Wednesday that it was slowing the pace of a program of rate hikes designed to tackle inflation — but that more increases are still on the table.

The Federal Open Market Committee said it raised the key federal funds rate by 0.5%, after announcing four consecutive increases of 0.75% at its most recent meetings. In its statement on Wednesday, the Fed said it continues to target an inflation rate of 2% over the long term and will continue to increase the federal funds rate to do so.

“Inflation remains high, reflecting supply-and-demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures,” the committee said.

But lower inflation is likely to come at the cost of higher unemployment in the short term: The Fed said it now expects the unemployment rate for 2023 to average 4.6%, equaling hundreds of thousands of workers out of work compared to the current rate of 3.7. . %.

In response to a question from NBC News correspondent Brian Cheung, Federal Reserve Chairman Jerome Powell said that while there could be potential “pain” in the future due to high unemployment, the difficulties Americans currently face with inflation — and the risk of rapid price growth could To last – guarantees to keep interest rates higher for longer.

“I wish there was a painless way to restore price stability,” Powell said. “There is no”.

The Labor Department reported on Tuesday that annual inflation hit 7.1% in November – the lowest reading in more than a year. While it’s still high compared to the 2% level at which the Fed typically seeks to rein in inflation, the latest figure suggests that the accelerated price growth from earlier this year is fading.

As a result, market analysts expect the Fed to announce another rate hike on Wednesday, likely smaller than the last four boosts, which were 0.75%.

The central bank sought to increase the cost of borrowing and investing to undo price increases.

It appears to be working. In addition to slowing price growth, layoff announcements are mounting. To be clear, the Fed is not seeking to create conditions that will accelerate the need for job cuts. But the monetary tools it uses to keep inflation in check can, in some cases, trigger an economic slowdown that could force some companies to reduce the size of their workforce.

Additional data this week from the New York Federal Reserve showed that US consumers now see inflation a year from now at 5.2%, down 0.7 percentage points from the previous month and the lowest forecast for next year since August 2021.

The Wall Street Journal reported Monday that many investors are shifting their fears of rampant inflation to weak, rapid growth. Notably, demand for bonds has increased, reflecting the growing interest in more stable yields often associated with slower economic growth.

Throw away inflation fears and engage recessionary fears

Meanwhile, major stock market metrics continue to decline on fears of declining corporate earnings.

“What we’ve seen over the past month is weakness in energy, weakness in the financial sector, weakness in the stock market and then… [Treasury] Interest rates are not going anywhere, said Michael Antonelli, managing director at financial services group Baird. “This is a recipe for a market that is more worried about an economic slowdown than inflation. If it was still worried about inflation, interest rates, energy and banking would be higher. So all the signs of inflation are reversed.”

Even when signs point to declining price growth, the Fed must convince consumers and investors alike that it intends to continue to keep inflation under control, said Gregory Daco, chief economist at EY-Parthenon, a unit of Ernst and Young LLP. This means that it will continue to indicate, for the time being, that it does not expect any interest rate cuts in the near future.

“The last thing the Fed wants is to tighten financial conditions which are now priced in to decline,” he said.

However, analysts agree that the Fed should not be as aggressive as it was forced to be for most of the year.

“The Fed’s messaging is likely the pinnacle of past tightening,” Bank of America economists said in a note on Tuesday.

But it is increasingly likely that the Fed is not only planning to hold off on raising interest rates in the coming months; It should also start planning ways to revitalize the ailing economy.

In a note to clients on Tuesday, James Knightley, ING’s chief international economist, said “recessionary forces” — such as easing supply chain challenges, higher borrowing costs, slowing overseas demand and lower global energy prices — will mean the Fed could It begins to reduce prices in the second half of 2023.

Mark Hamrick, chief economist at Bankrate, said in a note Tuesday that while a recession in 2023 is not a certainty, there is now broad agreement that one’s risks remain and that the trade-off has already been made.

“To mitigate historically high inflation for individuals, households and businesses, the Fed has been willing to accept recessionary risks if it fulfills its price stability mandate,” Hamrick said.

“A choice of at least two evils, is not unlike that when firefighters substitute some water damage for fire damage.”