The Federal Reserve on Wednesday, with inflation cooling, once more slowed the pace of its interest rate hikes, this time greenlighting a 25-basis-point increase.
The Federal Open Market Committee raised the federal funds rate to a range of 4.5% to 4.75% following its two-day meeting that concluded Wednesday. The 25-basis-point hike follows a 50-basis-point increase at the committee's last meeting in December, and four 75-basis-point hikes in each of its previous four meetings.
"Shifting to a slower pace will better allow the committee to assess the economy's progress toward our goals, as we determine the extent of future increases that will be required to attain a sufficiently restrictive stance," Fed Chairman Jerome H. Powell said at a press conference Wednesday.
"Restoring price stability will likely require maintaining a restrictive stance for some time," Mr. Powell added.
The committee's 12 members unanimously approved the latest rate hike and said in a statement that it expects "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."
Fed officials also maintained their stance that in determining the pace of future increases in the target range, it will consider the "cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments."
Since the committee's last meeting, data from the Bureau of Labor Statistics released Jan. 12 showed further progress on inflation. The consumer price index rose 6.5% in December from a year earlier, down from 7.1% year-over-year in November. The annualized CPI figure has dropped steadily since June, when it was at 9.1%, a 40-year high.
Moreover, the unemployment rate dropped to 3.5% in December.
Mr. Powell said the recent inflation data show a welcomed reduction in the monthly pace of increases. But while recent developments are encouraging, "We will need substantially more evidence to be confident that inflation is on a sustained downward path," he added.
Reducing inflation is likely to require a period of below-trend growth and some softening of labor market conditions, according to Mr. Powell. "Restoring price stability is essential to set the stage for achieving maximum employment and stable prices over the longer run," he said. "The historical record cautions strongly against prematurely loosening policy. We will stay the course until the job is done."
Bill Zox, portfolio manager at Brandywine Global Investment Management, said in a statement that he sees no signs yet that the Fed is open to rate cuts in 2023. "I'm not sure the Fed is even trying for a soft landing," he added. "While they would never say so, they might prefer the restorative aspects of a recession and a proper bear market."
At its December meeting, the committee's median projection for the federal funds rate at the end of 2023 jumped to 5.1%, up from a 4.6% projection in September. Also, its median projection at the end of 2024 is now 4.1%, up from its 3.9% projection in September.
The committee's next meeting is March 21-22; it will release updated projections then.
