US Fed signals more hikes after 50 basis points rise

Most US central bank officials expect rates will rise above 5 per cent next year, higher than previously expected, revising down their growth outlook.

US Federal Reserve chairman Jerome Powell expects the US to continue to raise rates but at a tempered pace. Picture: Mandel Ngan/ AFP

The US Federal Reserve approved an interest-rate increase of 50 basis points and signalled plans to keep raising rates at its next few meetings to combat high inflation.

The decision Wednesday marked a step down after four consecutive larger increases of 0.75 point and raised the benchmark federal-funds rate to a range between 4.25 per cent and 4.5 per cent, a 15-year high.

At his press conference Fed Chair Jerome Powell said recent data on cooling inflation in November was a “welcome reduction”.

“Still, he said, “it will take substantially more evidence to give confidence that inflation is on a sustained downward path.

Most officials pencilled in plans to raise the rate to between 5 per cent and 5.5 per cent next year, with the median projection implying a further 0.75 percentage point in rate rises.”

In September, they anticipated lifting it to around 4.6 per cent by the end of next year.

Officials made hardly any changes to their post-meeting policy statement, which continued to describe “ongoing increases” in interest rates as appropriate.

Most officials expect making somewhat less progress on inflation next year than they had anticipated in September.

They project core inflation, which excludes volatile food and energy categories, to fall from 5 per cent on an annual basis in October to 3.5 per cent at the end of next year. That is up from a projection of 3 per cent in September.

Fed officials say they combat inflation primarily by slowing the economy through tighter financial conditions — such as higher borrowing costs, lower stock prices and a stronger dollar — that curb demand. The fed-funds rate influences other borrowing costs throughout the economy, including rates on credit cards, mortgages and car loans.

Fed rate increases this year have hit asset prices and are causing a significant slowdown in rate-sensitive sectors of the economy such as housing. But in recent weeks, longer-term bond yields have tumbled as investors anticipate a speedy decline in inflation, possibly due to a recession next year.

Wall Street stocks turned lower on the prospect of continued rate hikes. Picture: Spencer Platt/Getty Images

Economic projections released Wednesday show officials expect their interest-rate increases will slow the economy over the coming year and push up the unemployment rate to 4.6 per cent next year, from 3.7 per cent in November.

Historically, an increase of that much in that span has coincided with a recession.

Many officials revised down their economic growth outlook for next year, with a couple of them projecting declines in gross domestic product.

Most see the economy expanding by 0.5 per cent next year before accelerating in 2024.

Wednesday’s decision capped a year in which the Fed raised rates from near zero at the fastest pace since the early 1980s to fight inflation, which reached a 40-year high in June.

In recent weeks, officials have signalled they are entering a new phase of policy tightening in which they would try to judge how much higher they need to raise rates.

Fed policy makers coalesced this spring around plans to raise rates by a half-percentage point at each meeting until they saw evidence inflation was slowing.

The central bank lifted rates by 0.75 percentage point in June, the largest increase in 28 years.

At the time, Mr Powell said such big moves would be uncommon. But continued high inflation and doubts in financial markets over the Fed’s commitment to fight it led the central bank to make three more increases of that magnitude.

Officials largely agreed at their meeting last month to slow rate increases beginning this week to better assess how their moves are influencing the economy. Rate increases work with what economists call long and variable lags, which means central bankers may not know for a year or more if they have tightened too much or not enough.

The pre-Christmas rate hike and predictions of a growth slowdown make for a holiday season full of contemplation across the world. Picture: Spencer Platt/AFP

e brought inflation-adjusted or “real” interest rates well above zero for all but the shortest-dated borrowing. Fed officials believe positive real rates are necessary to slow the economy.

Data released since the Fed’s November meeting have provided a mixed picture of the economy. While domestic demand has slowed and the housing market is entering a sharp downturn, the job market has remained strong and declines in gasoline prices could help sustain consumer spending.

“What’s impressed me to no end is it hasn’t broken anything. For all the talk of crashing the economy and breaking the financial markets, it hasn’t done that,” said Fed governor Christopher Waller last month, referring to the cumulative rate increases.

Inflation has slowed in the past two months. Consumer prices climbed 0.1 per cent in November from the previous month and 7.1 per cent from a year earlier.

Core prices, which exclude volatile food and energy categories, as a better predictor of future inflation than overall inflation. Over the past three months, core prices increased at a 4.3 per cent annualised rate, the lowest such reading in more than one year.

The projections released Wednesday showed considerable divergence over what might happen after next year. Around one third of officials expect to hold the fed-funds rate above 4.5 per cent through 2024. Most officials anticipate cutting rates by around 1 percentage point in 2024.

- The Wall Street Journal