The Federal Reserve conducted a smaller interest rate hike than in recent months, indicating that the central bank is confident its actions are starting to work to lower inflation and that it hopes to avoid a recession.
Following a two-day meeting of the Federal Open Market Committee in Washington, the central bank announced that it would hike its interest rate target by half of a percentage point, or 50 basis points. The move to slow from the 75 basis-point hikes of recent months was widely expected by Fed watchers.
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“Over the course of the year, we’ve taken forceful actions to tighten the stance of monetary policy,” Fed Chairman Jerome Powell said during a Wednesday press conference following the meeting. “We’ve covered a lot of ground, and the full effects of our rapid tightening so far are yet to be felt. Even so, we have more work to do.”
Since the start of the year, the central bank has jacked up rates by a whopping 425 basis points in an effort to bring down the excruciating inflation — the most forceful rate hikes since the Great Inflation of the late 1970s and early 1980s. The Fed’s target is now 4.25% to 4.50%, the highest it has been since before the financial crisis in 2008.
The 50-basis-point hike comes on the tail of a better-than-expected consumer price index report on Tuesday, which found inflation ticked down to 7.1% for the 12 months ending in November.
“Inflation data received so far for October and November show a welcome reduction in the monthly pace of price increases, but it will take substantially more evidence to give confidence that inflation is on a sustained downward path,” Powell said.
Many economists are undoubtedly breathing a sigh of relief that the Fed, led by Chairman Jerome Powell, didn’t jack up rates by 75 points for a fifth time in a row. If that would have occurred, markets would have likely tanked, given that the higher rates would mean a recession was more likely.
The officials also raised their projections for inflation. The median Fed official now sees inflation, as gauged by the personal consumption expenditures index, at 5.6% by the end of the year, compared to a September projection of 5.4%.
The Fed also upped its forecast for the unemployment rate in the coming months and years. It now predicts the unemployment rate will tick up to 4.6% by the end of next year, versus 3.7% today, an acknowledgment of the effects its aggressive tightening will have on the economy.
The committee members also revised down their GDP predictions for next year. from 1.2% to 0.5% growth, indicating the growing likelihood that a recession will hit the economy in 2023.
The Fed raises interest rates in the hopes of slowing inflation by dampening demand for goods and services. If the Fed is too heavy-handed in hiking its target rate, though, it can lead to a recession in which hundreds of thousands of people lose their jobs.
As the Fed has raised rates throughout the past year, the labor market has proven surprisingly resilient.
The economy gained 263,000 jobs in November, while the unemployment rate remained at 3.7%, a low figure by historical standards. The unemployment rate has flirted with 3.5% throughout the year, matching the ultra-low level it was at right before the pandemic took hold in 2020.
Inflation has been the biggest economic plotline in the news this year. It has undercut President Joe Biden’s approval rating and led to criticism of costly spending packages championed by congressional Democrats, which Republicans contend help fuel inflation.
As inflation fades, the possibility of a recession will begin to take center stage. Recent economic modeling by Bloomberg assigns a 100% chance of a recession occurring by next October.
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Economic sentiment among CEOs of the country’s largest companies has also plunged to its lowest level in more than two years as workers worry that layoffs might be on the horizon.
The combined index of CEO expectations for capital expenditures, employment, and sales hit its lowest level since the third quarter of 2020 in Business Roundtable’s quarterly survey of chief executives. It also marks the first time it has dipped below its long-run average since that same quarter.
