The Federal Reserve raised short-term interest rates Wednesday by a quarter percentage point, acknowledging the slowdown in inflation, as the central bank takes a step back to assess the impact of their policy tightening over the past year and sees signs inflation is cooling.
The rate hike brings the Fed’s policy benchmark rate, the federal funds rate, to a new range of 4.50% and 4.75%, marking the highest level since October 2007.
The 25 basis point rate hike marks a further slowdown after the Fed raised rates by 50 basis points in December and 75 basis points at meetings from June through November — the fastest clip since the 1980s.
Fed officials acknowleged that “inflation has eased somewhat but remains elevated” in their policy statement. They no longer noted that Russia’s war in Ukraine is contributing to upward pressure on inflation, rather is simply contributing to elevated global uncertainty
The Fed maintained language in its policy statement that “ongoing increases” in interest rates is appropriate to obtain a monetary policy that is “sufficiently restrictive” — in effect countering the recent easing in financial conditions.
The Fed noted that in determining the “extent” of future rate hikes, instead of the pace, that the Fed will take into account lags in monetary policy and the impact on inflation, the economy and financial markets.
After hitting a 40-year high last spring, the latest inflation numbers have shown easing for the past three months, though are still much higher than the Fed’s 2% target. The Fed’s preferred measure of inflation, the personal consumption expenditures index excluding food and energy, increased 4.4% in December from a year ago, down from the 4.7% reading in November — the slowest annual rate of increase since October 2021.
Meanwhile, the consumer price index, excluding food and energy prices, inched up 0.3% in December, after rising 0.2% in November. Year-over-year, core CPI rose 5.7%, down from the 6% seen in November.
The decision was unanimous.
Separately, as is customary at the beginning of each year, the Fed reaffirmed its commitment to its longer run goals and monetary policy strategy for stable prices, maximum employment and moderate long-term interest rates.
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