Fed Downshifts to Half-Point Hike, Sees 5.1% Rate Next Year
The Federal Reserve downshifted its rapid pace of interest-rate hikes while signaling that borrowing costs, now the highest since 2007, will outstrip investors’ expectations as the central bank works to rein in inflation.
The Federal Open Market Committee raised its benchmark rate by 50 basis points to a 4.25% to 4.5% target range. Policymakers projected rates would end next year at 5.1%, according to their median forecast, before being cut to 4.1% in 2024 — a higher level than previously indicated.
“The committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time,” the FOMC said in its statement, repeating language it has used in previous communications.
Following the hawkish projections, Treasury yields rose, the S&P 500 index dropped and the dollar index pared losses on the day.
Investors had been speculated that the Fed would soon pause its hikes after financial conditions eased. Until Wednesday, stocks had risen, while mortgage rates and the dollar had fallen since Powell last month suggested a policy shift was coming. They’d also bet rates would reach about 4.8% in May, followed by cuts totaling 50 basis points in the second half of the year.
The vote was unanimous.
Fed Chair Jerome Powell, who holds a press conference at 2:30 p.m. in Washington, had previously signaled plans to moderate hikes, while emphasizing that the pace of tightening is less significant than the peak and the duration of rates at a high level.
The decision follows four consecutive 75 basis-point hikes that have boosted rates at the fastest pace since Paul Volcker led the central bank in the 1980s.