Updated Dec 14, 2022 - Economy

Fed raises interest rates another half point, slowing pace of hikes

Federal Reserve chairman Jerome Powell speaks during a news conference on Wednesday. Photo: Al Drago/Bloomberg via Getty Images

The Federal Reserve on Wednesday raised its target interest rate by half a percentage point, slowing from its breakneck pace of hikes from earlier in the year while signaling rates will likely climb higher from here as the central bank expects a significant economic slowdown and rising unemployment.

Driving the news: The Fed's policy committee, following a two-day meeting, raised their federal funds rate target range to between 4.25% and 4.5%. In a statement announcing the move, the committee said it anticipates “ongoing increases in the target range will be appropriate” to bring down inflation.

  • In projections accompanying the announcement, the median Fed official expected rates to reach 5.1% late next year, implying another 0.75 percentage point in rate hikes in 2023. In September, the median official anticipated only a 4.6% peak rate.
  • Officials also revised up their expectation for how high the unemployment rate will rise as the impact of tighter money ripples through the economy. The median Fed leader now expects a jobless rate of 4.6% by late next year, up from 3.7% now and 4.4% forecast in September.

The median Fed official sharply revised down their forecast for GDP next year, and now anticipates the economy will grow 0.5% over the coming year, not the 1.2% projected in September.

  • Two officials anticipate GDP will contract between Q4 2022 and Q4 2023, implying those officials think a recession is more likely than not.

What they're saying: "I just don't think anyone knows if we're going to have a recession or not — and if we do, whether it's going to be a deep one or not," Fed chair Jerome Powell said at a news conference following the policy decision.

  • Powell said a soft-landing — or that the U.S. can avert a recession — is still a possibility.
  • Still, he anticipates there will be pain for households as the Fed tries to bring inflation down to its 2% target: "There will be some softening in labor market conditions. I wish there were a completely painless way to restore price stability. There isn't."

Catch up quick: The central bank has raised the odds of a recession with its campaign of rapid interest rate increases — including four straight meetings featuring 0.75 percentage point rate hikes, the most in modern times.

  • With the move to a slower pace of rate rises, the Fed is buying time to see how its rate hikes filter through the economy, with the option to calibrate its policies further in 2023 depending on what happens with inflation.
  • Soft inflation readings for both October and November have increased market expectations that the central bank may be able to end its rate increases at an early February meeting. Powell said that those soft readings are welcome, but "it will take substantially more evidence to give confidence that inflation is on a sustained downward path."

Yes, but: The Fed is showing little sign of backing off the tightening campaign, or of turning toward rate cuts next year.

  • Financial markets have responded giddily in recent weeks — stocks rising, bond yields falling — in response to that possibility, a development that cuts against the Fed's goals of tighter policy.
  • Powell on Wednesday emphasized that the central bank was charting an aggressive path in an effort to wrangle inflation — noting 17 out of 19 Fed officials penciled in a peak rate of at least 5% by the end of next year in the projections released on Wednesday.
  • "I can't tell you confidently that we won't move up our estimate of the peak rate again," Powell said, noting that decision will depend on how economic data evolves.

The intrigue: Some analysts thought that in their policy statement the central bank would delete the language about “ongoing increases” in rates being appropriate. Instead, the Federal Open Market Committee stuck with that language.

Of note: The vote was unanimous on Wednesday’s policy action.

Editor's note: This story has been updated with new details throughout.

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