Fed downshifts to half-point hike, sees 5.1% rate next year

Investors expect borrowing costs to be the highest since 2007 now as the Federal Reserve (Fed) slows its pace of rapid rate hikes while the central bank seeks to ensure inflation is contained. suggests that it will rise further.

of Federal Open Market Committee We raised our benchmark interest rate by 50 basis points to our target range of 4.25-4.5%. Policy makers expect interest rates next year he will end at 5.1% and will be cut to 4.1% in 2024, according to the median forecast. This is a higher level than previously indicated.

Hawkish predictions could shock financial marketSpeculation that the Fed will soon pause rate hikes has helped ease financial conditions.

It also increases the likelihood of higher borrowing costs for new and used cars and other forms of credit, especially mortgages. Rapidly rising interest rates this year have already slowed the housing and construction markets, the main drivers of light truck demand.

Stocks have risen, mortgage rates and the dollar have fallen since Powell signaled a policy shift last month.

Pre-decision investor stakes reached about 4.8% in May, followed by a total of 50 basis points of rate cuts in the second half of the year. This reflects the view that the Fed will be forced to shift in response to a weakening economy and lower inflation. .

Instead, Fed officials were firm on Wednesday.

“The committee believes continued increases in the target band are appropriate to achieve a monetary policy stance that is sufficiently restrictive to bring inflation back to 2% over time,” the FOMC said in a statement. I anticipate it,” he said. previous communication.

The vote was unanimous.

Fed Chairman Jerome Powell has previously hinted at plans to ease rate hikes, but stressed that the pace of tightening is not as important as the peak or duration of high rates.

The decision follows four consecutive 75-basis-point hikes that pushed rates up at the fastest pace since Paul Volcker headed the central bank in the 1980s.

Consumer price hike has begun a more pronounced slowdown from its 40-year high earlier this year. However, a growing number of economists expect the US to plunge into recession next year due to aggressive Fed action.

Those concerns have drawn criticism from lawmakers, with Democrats Elizabeth Warren, Bernie Sanders and Sheldon White House warning that raising rates risks “slowing the economy.”

Officials gave clear signs they expected the rate hike to affect the economy. They lowered his 2023 growth forecast to see 0.5% growth, according to the median forecast released Wednesday. They slightly raised his 2022 GDP estimate to 0.5%. The central bank has raised its unemployment rate forecast for next year to 4.6% from his 3.7% in November.

The distribution of interest rate forecasts is also more highly skewed, with 7 out of 19 officials expecting rates to exceed 5.25% next year.

The Federal Reserve has raised estimates for its primary and core measure of inflation, a measure of consumer spending. Currently, his PCE in 2023 is 3.1%, compared to an estimated 2.8% in September, and core (excluding food and energy) could be 3.5% next year.

Wednesday’s move caps off a difficult year for the US central bank, which was slow to begin tightening policy in response to surging price pressures.

Since raising interest rates from near zero in March, the Fed has aggressively caught up while maintaining hopes of a soft landing that avoids a dramatic surge in unemployment.

Officials are trying to slow growth to below its long-term trend to cool the labor market, and job openings still far outstrip U.S. unemployment.

Consumer prices rose 7.1% in the year to November, the lowest for the year, according to government data.

Still, Powell has repeatedly said the economy is willing to take some pain to keep inflation down and avoid the Fed’s 1970s mistake of prematurely easing monetary policy.