The Federal Reserve raised its benchmark interest rates by another half a percentage point to bring down inflation, the smallest hike since the Fed embarked in June of this year on a series four 0.75 point hikes.
The increase approved Wednesday at the conclusion of the two-day meeting of the Federal Open Market Committee lifts the central bank’s federal-funds target to a range between 4.25 percent and 4.5 percent. The Fed is widely expected to continue to raise rates at subsequent meetings, although at a slower pace than last year.
Federal Reserve officials last year underestimated the persistence and strength of inflationary pressures in the economy, initially claiming prices were rising due to “transitory factors” such as temporary supply chain hiccups related to the post-pandemic reopening and unusually high levels of goods purchases. Instead of fading, however, inflation gathered steam and spread from a few goods into a much broader range of consumer products and eventually the services sector.
Fed officials now see a risk of inflation becoming entrenched in the economy. To avoid this, the central bank has been trying to lower aggregate demand, which Fed officials will lead to sluggish growth and less appetite for labor. Although rising wages have mostly lagged behind prices and have not been the source of inflation, Fed officials fear that could change. Federal Reserve Chairman Jerome Powell has described the labor market as “clearly unbalanced.”
Along with its rate decision, the Fed released a new set of economic projections of Fed officials. At the September policy meeting, most Fed officials thought they would raise the federal-funds target to around 4.6 percent early next year. In the December projections, Fed officials raised their projections for the target next year to 5.1 percent. The Fed anticipates cutting its target to around 4.1 percent in 2024, up from the prior projection of 3.9 percent, and to around 3.1 percent in 2025, up from the earlier forecast of 2.9 percent.
The Fed also raised its projections for inflation and unemployment. The projected unemployment level for the end of next year and the following year was moved up to 4.6 percent from 4.4 percent. Inflation is now projected at 3.5 percent at the end of next year, up from 2.8 in September, and 2.5 percent at the end of next year, up from the earlier estimate of 2.3 percent.
The Fed’s statement announcing the rate hike was mostly unchanged from the November statement.
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