AP

Fed raises key rate by half-point and signals more to come

Dec 13, 2022, 7:01 AM | Updated: Dec 14, 2022, 3:26 pm

FILE- In this Feb. 5, 2018, file photo, the seal of the Board of Governors of the United States Fed...

FILE- In this Feb. 5, 2018, file photo, the seal of the Board of Governors of the United States Federal Reserve System is displayed in the ground at the Marriner S. Eccles Federal Reserve Board Building in Washington. The Federal Reserve reinforced its inflation fight Wednesday, Dec. 14, 2022, by raising its key interest rate for the seventh time this year and signaling more hikes to come. But the Fed announced a smaller hike than it had in its past four meetings at a time when inflation is showing signs of easing. (AP Photo/Andrew Harnik, File)

(AP Photo/Andrew Harnik, File)

WASHINGTON (AP) — The Federal Reserve reinforced its inflation fight Wednesday by raising its key interest rate for the seventh time this year and signaling more hikes to come. But it announced a smaller hike than it had in its past four meetings at a time when inflation is showing signs of easing.

The Fed made clear, in a statement and a news conference by Chair Jerome Powell, that it thinks sharply higher rates are still needed to fully tame the worst inflation bout to strike the economy in four decades.

The central bank boosted its benchmark rate a half-point to a range of 4.25% to 4.5%, its highest level in 15 years. Though lower than its previous three-quarter-point hikes, the latest move will further increase the costs of many consumer and business loans and the risk of a recession.

More surprisingly, the policymakers forecast that their key short-term rate will reach a range of 5% to 5.25% by the end of 2023. That suggests that the Fed is poised to raise its rate by an additional three-quarters of a point and leave it there through next year. Some economists had expected that the Fed would project only an additional half-point increase.

The latest rate hike was announced one day after an encouraging report showed that inflation in the United States slowed in November for a fifth straight month. The year-over-year increase of 7.1%, though still high, was sharply below a recent peak of 9.1% in June.

“The inflation data in October and November show a welcome reduction,” Powell said at his news conference. “But it will take substantially more evidence to give confidence that inflation is on a sustained downward path.”

In its updated forecasts, the Fed’s policymakers predicted slower growth and higher unemployment for next year and 2024. The unemployment rate is envisioned to jump to 4.6% by the end of 2023, from 3.7% today. That would mark a significant increase in joblessness that typically would reflect a recession.

Consistent with a sharp slowdown, the officials also projected that the economy will barely grow next year, expanding just 0.5%, less than half the forecast it had made in September.

“The Fed is not done — it sees a prolonged slowdown and a rise in unemployment as the only way to fully derail inflation,” Diane Swonk, chief economist at KPMG, said in a research note.

Though Powell said he thought the economy could still avoid a recession, the Fed’s economic forecasts show the policymakers expect job losses to result from its higher rates.

“They really need the unemployment rate to go higher and wages to start coming down,” said Subadra Rajappa, an investment strategist at Societe Generale. Powell has said that slower wage growth would reduce inflation pressures.

Powell said Wednesday, “I just don’t think anyone knows whether we’re going to have a recession or not. … I wish there were a completely painless way to restore price stability. There isn’t.”

In recent weeks, Fed officials have indicated that they see some evidence of progress in their drive to bring inflation back down to their 2% annual target. The national average for a gallon of regular gas, for example, has tumbled from $5 in June to $3.21.

Many supply chains are no longer clogged, thereby helping reduce goods prices. The better-than-expected November inflation data showed that the prices of used cars, furniture and toys all declined last month.

So did the costs of services from hotels to airfares to car rentals. Rental and home prices are falling, too, though those declines have yet to feed into the government’s data.

And one measure the Fed tracks closely — “core” prices, which exclude volatile food and energy costs for a clearer snapshot of underlying inflation — rose only slightly for a second straight month.

Inflation has also eased slightly in Europe and the United Kingdom, leading analysts to expect the European Central Bank and the Bank of England to slow their pace of rate hikes at their meetings Thursday. Both are expected to raise rates by half a point to target still painfully high prices spikes after big three-quarter-point increases.

Inflation in the 19 countries using the euro currency fell to 10% from 10.6% in October, the first decline since June 2021. The rate is so far above the bank’s 2% goal that rate hikes are expected to continue into next year. Britain’s inflation also eased from a 41-year record of 11.1% in October to a still-high 10.7% in November.

Many economists think the Fed will further downshift to a quarter-point rate hike when it next meets early next year. Asked about that Wednesday, Powell said he has yet to decide how large he thinks the next hike should be. But having raised rates so fast, he said, “we think the appropriate thing to do now is to move at a slower pace. That will allow us to feel our way.”

Powell downplayed any notion that the Fed might decide to reverse course next year and start cutting rates to support growth, as Wall Street investors are expecting.

“I wouldn’t see the committee cutting rates until we’re confident that inflation is moving down in a sustained way,” he said.

Cumulatively, the Fed’s hikes have led to much costlier borrowing rates for consumers as well as companies, ranging from mortgages to auto and business loans. They have sent home sales plummeting and are starting to weigh down rents on new apartments, a leading source of high inflation.

Fed officials have said they want rates to reach “restrictive” levels that slow growth and hiring and bring inflation down to their target range. Worries have grown that the Fed is raising rates so much in its drive to curb inflation that it will trigger a recession next year.

Powell’s biggest focus has been on services prices, which he has said are likely to stay persistently high. In part, that’s because sharp increases in wages are becoming a key contributor to inflation. Services companies, like hotels and restaurants, are particularly labor-intensive. And with average wages growing at a brisk 5%-6% a year, price pressures keep building in that sector of the economy.

With many service-sector employers still desperate for workers, Powell said pay growth may remain above what’s consistent with the Fed’s 2% inflation target.

“We have a long way to go,” the Fed chair said, “to get to price stability.”

___

AP Business Writer David McHugh contributed to this report from Frankfurt, Germany.

Copyright © The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

AP

idaho gender-affirming care...

Associated Press

Supreme Court allows Idaho to enforce its ban on gender-affirming care for transgender youth

The Supreme Court is allowing Idaho to enforce its ban on gender-affirming care for transgender youth while lawsuits over the law proceed.

11 hours ago

Image: Former President Donald Trump speaks to the press in Manhattan state court in New York City ...

Associated Press

Trump’s hush money trial gets underway; 1st day ends without any jurors selected

The historic hush money trial of Donald Trump got underway Monday with the arduous process of selecting a jury to hear the case.

23 hours ago

Photo: Israeli Iron Dome air defense system launches to intercept missiles fired from Iran, in cent...

Tia Goldenberg and Josef Federman, The Associated Press

Israel is quiet on next steps against Iran — and on which partners helped shoot down missiles

On Sunday, Israel's leaders credited an international military coalition with helping thwart a direct attack from Iran.

2 days ago

Early phases of Iran's drone attack against Israel. (Photo: Getty Images)...

Associated Press

The Latest | Iran launches its first direct military attack against Israel

Iran launched its first full-scale military attack against Israel on Saturday, sending drones toward Israel.

3 days ago

Early phases of Iran's drone attack against Israel. (Photo: Getty Images)...

Associated Press

BREAKING: White House confirms Iran drone attacks towards Israel

JERUSALEM (AP) — The White House says it will provide unspecified support for Israel’s defense against an ongoing airborne attack from Iran. National Security Council spokesperson Adrienne Watson said in a Saturday statement that “Iran has begun an airborne attack against Israel.” She added: “The United States will stand with the people of Israel and […]

3 days ago

Image: O.J. Simpson attends his parole hearing at Lovelock Correctional Center July 20, 2017 in Lov...

Associated Press

O.J. Simpson, fallen football hero acquitted of murder in ‘trial of the century,’ dies at 76

O.J. Simpson, the former NFL star and Hollywood actor who was acquitted of charges he killed his ex-wife and her friend has died at 76.

5 days ago

Fed raises key rate by half-point and signals more to come