Fed lifts interest rates again but foresees only a ‘couple more hikes’ in its inflation fight

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The Federal Reserve on Wednesday approved a quarter-percentage-point hike in a key US interest rate and signaled that “a few more hikes” are likely before the central bank takes a breather in its fight against inflation.

The Fed on Wednesday raised its benchmark short-term rate to a range of 4.5% to 4.75%. The decision came after six consecutive major rate hikes as the Fed steps up its effort to stave off the worst inflation in 40 years.

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Fed Chairman Jerome Powell said a “deflationary” process is underway at a news conference following the decision. Yet he also reiterated that the Fed needs to see “significantly more evidence” that price pressures are waning.

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A face-off ensued and escalated after Powell’s comments. The Fed’s initial public statement appeared to be a tough one, reiterating its view that ongoing growth was needed “to bring inflation back to 2% over time.”

Ahead of the Fed meeting, some economists suggested the bank may be signaling that it is nearing the end of the rate-hike cycle that began last spring.

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The central bank changed parts of its statement to indicate it would raise rates in smaller increments.

“The [Fed] “Debating how fast to raise rates has moved past the second phase, debating how far to raise rates,” said Chris Low, chief economist at FHN Financial. “Step three will debate how long to keep rates at their peak.”

In December, the bank’s interest-rate-setting panel estimated its benchmark rate to be in the range of around 5% to 5.25%. As Powell noted, this suggests two more rate hikes of a quarter point each.

Wall Street was not entirely sure that the Fed would keep raising rates. Many investors believed that it would close soon and would also start cutting rates towards the end of the year.

Analysts pointed to a slowing economy and tepid inflation to support the Fed’s case for easing monetary easing. If this continues, he argues, the US could be in the grip of a recession.

The economy has slowed down. Hiring has slowed for five straight months, and January hiring could be the weakest in two years. Several other indicators also point to spreading weakness.

The annual rate of inflation, based on the consumer-price index, slowed to 6.5% by December from a four-decade peak of 9.1% last summer.

Powell again cautioned that it was too early for the Fed to consider cutting rates until it had made more progress in its fight against inflation.

Although inflation is expected to continue to slow, prices are rising at more than triple the annual average in the decade leading up to the pandemic. The Fed is trying to restore inflation to pre-crisis levels of 2% or more.

The Fed’s biggest concern is rising wages due to a tight labor market that threatens to prolong the high-inflation battle. If employee wages continue to rise rapidly, companies are likely to continue to rise in what is known as a wage-value spiral.

Labor cost increases are slowing as the economy softens, but businesses are still grappling with labor shortages.

As a result, worker compensation rates rose 5% in the 12 months ending December, nearly double the pre-pandemic average.

The labor market is “extremely tight,” Powell said.

Credit: www.marketwatch.com /

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