The Federal Reserve on Wednesday raised its benchmark interest rate by a quarter of a point, further slowing its aggressive campaign to cool the economy amid growing evidence that stubbornly high inflation is finally starting to ease.
The widely expected move puts the key benchmark federal funds rate at a range of 4.5% to 4.75%, the highest since 2007, from near-zero in March 2022. It marks the eighth consecutive rate increase, following a half-point hike in December and four jumbo-sized 75-basis-point hikes before that.
Fed officials are in the midst of the most aggressive tightening campaign since the 1980s as they try to crush stubbornly high inflation that is still running near the highest pace in four decade, despite early signs of a slowdown.
The big question for investors is what comes next in the Fed’s inflation fight – including how much higher officials plan to raise rates, and what they need to see before stopping the increases. Markets – which have bet on rate cuts in the second half of the year – fell after the Federal Open Market Committee signaled “ongoing increases” in the federal funds rate are necessary.
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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 FOMC said in its post-meeting statement, unchanged from December.
Stocks fell on the news, with the Dow Jones Industrial Average shedding more than 300 points.
The rate hike decision underscore just how committed the Fed is to wrestling high inflation under control, despite early evidence that consumer prices may have peaked earlier this year. Government data released earlier this month showed that the consumer price index fell 0.1% in December from the previous month, although it remains up 6.5% from the same time one year ago.
Inflation remains about three times above its pre-pandemic average and far higher than the Fed’s 2% target.
The meeting comes against the backdrop of a slowing economy and rising fears of a downturn. Demand is weakening among consumers, gross domestic product is softening and the housing market is almost certainly in a recession.
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There are also signs the labor market is beginning to slow, with the economy adding just 223,000 jobs in December, the smallest gain in two years.
A growing number of Wall Street economists anticipate the Fed’s actions will tip the economy into a recession next year. Hiking interest rates tends to create higher rates on consumer and business loans, which then slows the economy by forcing employers to cut back on spending.
This is a developing story. Please check back for updates.