The Federal Reserve slowed its drive to rein in inflation and said further interest-rate hikes are in store as officials debate when to end their most aggressive tightening of credit in four decades.
Chair Jerome Powell and fellow policymakers lifted the Fed’s target for its benchmark rate by a quarter percentage point to a range of 4.5% to 4.75%. The smaller move followed a half-point increase in December and four jumbo-sized 75 basis-point hikes prior to that.
“We think we’ve covered a lot of ground,” Powell told reporters after the meeting. “Even so, we have more work to do.”
Investors took heart from Powell’s remarks acknowledging that price pressures have started to ease, even though he reiterated the Fed’s outlook for more rate hikes. The S&P 500 climbed after briefly falling to session lows as he spoke and two-year yields fell.
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“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 Fed said in a statement issued after the two-day policymaking meeting, repeating language it has used in previous communications.
The unanimous decision by the Federal Open Market Committee was in line with financial market expectations.
In a sign that the end of the hiking cycle may be in sight, the committee said the “extent of future increases” in rates will depend on a number of factors including cumulative tightening of monetary policy. It had previously tied the “pace” of future increases to those factors.
In another shift from its last statement, the Fed noted that inflation “has eased somewhat but remains elevated,” suggesting policymakers are growing more confident that price pressures have peaked.
That compares with prior language where officials simply stated price growth was “elevated.”
Investors wanted to know if Powell would push back against market expectations that the Fed will cut rates later in the year as inflation eases and economic growth slows. He did.
“Restoring price stability will likely require maintaining a restrictive stance for some time,” he told reporters. While recent readings on price pressures were encouraging, he added that “it would be very premature to declare victory.”
At their prior meeting in December, 17 of 19 policymakers forecast that they’ll increase rates to 5% or above this year, with none looking for cuts.
There were no fresh forecasts published on Wednesday but Powell did reference those projections as a guide about how much higher officials expect to raise rates.
Some Fed officials sounded more hopeful last month that they can achieve a soft landing of the world’s largest economy, bringing down inflation without crashing the US into a recession. White House officials and the International Monetary Fund are also voicing more optimism.
Most private economists though don’t think the Fed will get by without pushing the US into a downturn. Forecasters surveyed by Bloomberg in January put the probability of a contraction over the next year at 65%.
After initially dismissing a surge in prices as temporary, Fed policymakers have been scrambling to get control of runaway inflation before it becomes embedded into the economy, lifting rates sharply from levels close to zero as recently as a year ago.
They’re also reducing the Fed’s balance sheet at a record clip, withdrawing hundreds of billions of dollars from the financial system.
Price Target
While policymakers have had some success in reining in inflation - the Fed’s favorite gauge slowed to a year-on-year rate of 5% in December from 7% in June - they’ve been loath to declare victory until they’re confident price rises are on track to return to their 2% price target.
“It is gratifying to see the disinflationary process now getting under way and we continue to get strong labor market data,” Powell said. Still, the chair said that officials would need “substantially more evidence” that inflation was on a sustained downward path.
Pressed to spell out if that represented a certain number of months of continued downward progress on prices, he said it would be an accumulation of factors.
Powell has zeroed in on the labor market as a source of potential inflationary pressure, arguing that demand for workers is outstripping supply and that wages are rising too quickly to be consistent with the Fed’s 2% inflation target.
Officials got some welcome news on that front as they began their two-day meeting Tuesday, with the Labor Department reporting that a broad gauge of wages and benefits slowed in the final three months of 2022.
Another reading on the jobs market arrives Friday, when the government releases the employment report for January. Payrolls growth is forecast to have slowed to 190,000 last month from 223,000 in December while unemployment may have ticked up to 3.6% from 3.5%.
The Fed’s repeated rate increases have taken a toll on the US economy. Hammered by a steep rise in mortgage rates, the housing market has slumped, with new home sales declining in 2022 to their lowest level in four years.
Manufacturing has also hit the skids, hurt by a slowdown in the global economy and a shift in consumer spending away from goods to services. Industrial production has dropped for three straight months.
However, consumer expenditures, the bulwark of the economy, have generally held up in the face of sky-high inflation, as households drew on savings built up during the pandemic and saw incomes boosted by a vibrant jobs market.
But there were signs of fraying as 2022 drew to a close. Adjusted for changes in prices, personal spending dropped 0.3% in December, with outlays for services stagnating, the first month without an increase since January 2022.
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