Fed charge choice February 2023: hike by 1 / 4 level

The Federal Reserve raised its benchmark interest rate by a quarter of a point on Wednesday, giving little indication that it is nearing the end of this cycle of rate hikes.

In line with market expectations, the rate-setting Federal Open Market Committee raised the federal funds rate by 0.25 percentage point. It thus reaches a target range of 4.5% to 4.75%, the highest since October 2007.

The move was the eighth increase in a process that began in March 2022. The funds rate itself determines which banks charge each other for overnight loans, but it also impacts many consumer debt products.

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The Fed’s interest-rate hikes are aimed at bringing down inflation, which despite recent signs of slowing is still near its highest level since the early 1980s.

The statement after the meeting noted that inflation “has eased somewhat but remains high,” an adjustment to earlier language.

“Inflation data we’ve received over the past three months shows a welcome slowdown in the pace of monthly increases,” Fed Chair Jerome Powell said in his post-meeting press briefing. “And while recent developments are encouraging, we need far more evidence to be confident that inflation is on a sustained downward path.”

However, markets expected signs at this week’s meeting that the Fed was about to end rate hikes. But the statement provided no such signals. First, stocks fell on the announcement, with the Dow Jones Industrial Average falling more than 300 points.

However, the market rallied during Powell’s press conference after he confirmed that “the disinflation process” had begun. The major moving averages eventually turned positive as market commentary focused on Powell’s somewhat optimistic comments on progress against inflation.

“We can now say, I think for the first time that the disinflation process has started,” Powell said, while also noting that it would be “very premature to declare victory or to believe that we actually achieved that.”

The Fed’s statement included a comment that the FOMC still sees the need for “continuous increases in target range.” Market participants had hoped for some relaxation of the phrase, but the statement, adopted unanimously, kept it intact.

The statement changed part when describing what will determine the future political path.

Officials said they would determine the “magnitude” of future rate hikes based on factors such as the past impact of rate hikes, the delays in policy impact and developments in financial conditions and the economy. Previously, the statement said these factors would be used to determine the “pace” of future rate hikes, a possible nod that the committee sees an end to hikes somewhere, or at least a continuation of smaller steps in the future.

In 2022, the Fed approved four consecutive hikes of 0.75 percentage points before moving to a smaller 0.5 percentage point hike in December. In recent public statements, several officials said they thought the central bank could at least scale back the scope of rate hikes without signaling when they might end.

While raising interest rates, the committee described economic growth as “modest,” though noting only that unemployment had “remained low.” The latest jobs assessment omitted previous language that job gains had been “robust”.

Otherwise, the statement remains intact to previous reports as the Fed continues its efforts to stem inflation.

The Fed was firmly focused on inflation

The Fed’s policies are believed to have a lag – if the central bank hikes rates, the economy needs time to adjust to tighter money controls.

This particular round of inflation started due to Covid-related factors such as congested supply chains and rising demand for goods over services. The war in Ukraine exacerbated soaring gas prices, while unprecedented fiscal and monetary stimulus fueled rising costs for a variety of goods and services.

Food prices have increased by more than 10% in the past year. Egg prices alone are up 60% by December, butter is up more than 31% and lettuce is up 25%, according to Labor Department data. Gas prices trended lower towards the end of 2022 but have been rising in recent days, hitting $3.50 a gallon statewide, up about 30 cents over the past month, according to the AAA.

Fed officials have remained determined to fight inflation, although they said recent numbers show the pressure may be easing. The consumer price index fell 0.1% on a monthly basis in December and is up 6.5% year-on-year — lower than last summer’s 9% peak, but still well above what the Fed is finding comfortable.

Fed bond purchases

Along with the rate hikes, the Fed has reduced holdings in its bond portfolio. This has resulted in a reduction of about $445 billion since June as the Fed targets a $95 billion cap on maturing bonds, which it allows to mature each month rather than being reinvested.

According to the San Francisco Fed, the balance sheet contraction was equivalent to about 2 percentage points of additional rate hikes. The balance sheet is still more than $8.4 trillion.

Markets are waiting to see where the Fed will finally end hikes.

At the December FOMC meeting, committee members indicated that they see the “final rate,” or point at which the Fed believes policy is sufficiently hawkish, at 5.1%. Markets are betting the number closer to 4.75% and expect the Fed to start cutting rates later this year after another quarter point hike in March.

In response to a question from CNBC’s Steve Liesman, Powell said it was “possible” that interest rates could stay below 5%. But he also said the Fed is unlikely to cut rates this year unless inflation falls more quickly.

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