As expected, Fed slows pace of interest rate gains but committed to reducing inflation

The Federal Reserve raised interest rates by 50 basis points, ending a four-meeting string of 75-basis-point hikes. The Fed’s policy rate, which began the year at 0% to 0.25%, is now in a target range of 4.25% to 4.50%, the highest since late 2007. “The (Federal Open Market) Committee is highly attentive to inflation risks... Ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time,” the Fed said in a statement nearly identical to the one it issued at its November meeting.

In his post-meeting press conference, Chair Jerome Powell said the Fed needs “substantially more evidence to give confidence that inflation is on a sustained downward path.” He was non-committal when asked whether the next Fed rate hike would decline to 25 basis points and said it was too soon to talk about cutting interest rates. Powell said, “Our focus right now is really on moving our policy stance to one that is restrictive enough to ensure a return of inflation to our 2% goals over time.” He noted the Fed would not consider changing its 2% inflation target “under any circumstances.”

In the updated “dot-plot” forecasts, Fed officials projected the federal funds rate will rise to 5.1% by the end of 2023. That’s up from 4.6% projected in September. The median forecasts for interest rates in 2024 and 2025 increased 0.2 point each to 4.1% and 3.1%, respectively. Inflation, based on the Personal Consumption Expenditures price index, is projected at 3.1% at the end of next year, up from a 2.8% forecast in September. The PCE index is projected to fall to 2.5% in 2024 and 2.1% in 2025. Gross domestic product is projected to grow just 0.5% next year, the same as estimated for 2022, before rising to 1.6% in 2024 and 1.8% in 2025.