The Fed Meeting on Wednesday, saw the Federal Reserve raise interest rates by a quarter of a percentage point, bringing the federal funds rate to a target range of 4.5%-4.75%. This is the highest it has been since October 2007 and stands in line with market expectations.
The decision was made by the Federal Open Market Committee (FOMC) and was met without any indication that this hike signals nearing the end of its current cycle. Chair Jerome Powell will hold a press conference today at 2:30pm ET to discuss both this and other policy decisions from their meeting.
The decision to raise interest rates by 0.25% on Wednesday marked the eighth increase since their process began in March 2022. This uptick in the federal funds rate not only affects what banks charge each other for overnight borrowing, but also causes a ripple effect throughout other consumer debt products.
Fed Meeting With aim to tackle inflation
The Federal Reserve is working to bring down inflation, which has been hovering close to its highest levels since the early 1980s, through their ongoing rate hike cycle. The post-meeting statement noted that inflation “has eased somewhat but remains elevated” indicating a softer approach than their previous indications.
Markets had hoped this week’s meeting would provide indications that the Federal Reserve was preparing to end their rate increases, however no such signals were given in the post-meeting statement. This caused a sell-off in stocks, with the Dow Jones Industrial Average (DJIA) dropping more than 300 points.
The sentiments of the document noted the FOMC’s continued support for “ongoing increases in the target range.” This was unchanged from previous statements, despite markets hoping that it would be softened. The statement was ultimately approved unanimously by the FOMC.
The statement included a change in language when describing what will determine the future policy path. This shift could suggest that the committee expects the increases to slow down or stop at some point in the future. The statement also indicated that the Fed will take into account developments in financial conditions and the economy when determining future hikes, as well as their impact and lags.
Are the rate hikes going to slow… or stop?
The Federal Reserve approved four consecutive rate hikes of 0.75 percentage points in 2022, followed by a smaller 0.5 percentage point increase in December. Public statements have indicated that the Fed could reduce the increases without indicating an end to them.
The Federal Reserve has made an adjustment in their job market assessment, replacing the phrase “robust” with “low” when referring to unemployment. Economic growth was characterized as “modest” by the committee.
The Federal Reserve remains dedicated to combating inflationary pressures. Fed policy is known to take effect on a delay—that is, it can take some time for the economy to adjust to the tighter control of money that comes with rate hikes. This round of inflation has been attributed to a variety of factors, from Covid-related supply chain disruptions and unprecedented fiscal and monetary stimulus resulting in higher prices across goods and services, to increases in food prices such as a 60% spike in egg prices.
The war in Ukraine has also had a significant impact on global gas prices. Additionally, fiscal and monetary stimulus have contributed to rising costs across many different items and commodities.
Inflation bites in all areas, but easing on recent data
Food prices have seen a steep rise of more than 10% over the past year, with egg prices skyrocketing by 60%, butter up by 31%, and lettuce increasing by 25%. Gas prices were trending downwards in the late months of 2022 but have recently surged to $3.50 per gallon nationally, an increase of 30 cents month-on-month.
As inflation continues to remain a concern, Federal officials have pledged to keep a tight rein on the situation. Recent data indicates that the consumer price index saw a decrease of 0.1% in December on a month-to-month basis and is up 6.4% from the same period last year, although this number has dropped from its peak of 9% last summer. Nonetheless, inflation levels remain well above what the Fed deems comfortable for economic stability.
To further combat inflation, the Federal Reserve has been steadily reducing its bond portfolio. Since June, the decrease amounts to $445 billion as the Fed has established a limit of $95 billion in maturing bonds that it will allow to roll off monthly instead of reinvesting. This is part of its strategy to keep rising prices under control and promote a more stable economy.
Despite the balance sheet reduction, the total amount stands at more than $8.4 trillion. This is equivalent to roughly two percentage points of additional rate hikes, as estimated by the San Francisco Federal Reserve. The markets are keeping a close eye on the FED and seeing when they will likely put a stop to the increases.
At the December FOMC meeting, members of the committee expressed their belief that the terminal rate would remain at 5.1%. However, markets appear to disagree and anticipate a lower rate of 4.75%. The market believes that this could be followed by a quarter-point increase in March and then rate cuts later in the year.
2023 started off on a positive note as investors’ sentiment shifted to expect a more relaxed Fed policy. This was reflected in the stock market, which saw a rally buoyed by expectations of looser regulations.
Click here to read the full press release by the Federal Reserve