USA | Feb 1, 2023

Fed opts for small rate hike, still expects to deliver ‘ongoing increases’

/ Our Today

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The Federal Reserve building is seen in Washington, US. (File Photo: REUTERS/Joshua Roberts)

Washington (Reuters)

The Federal Reserve raised its target interest rate by a quarter of a percentage point today (February 1) yet continued to promise “ongoing increases” in borrowing costs as part of its still unresolved battle against inflation.

“Inflation has eased somewhat but remains elevated,” the US central bank said in a statement that marked an explicit acknowledgement of the progress made in lowering the pace of price increases from the 40-year highs hit last year.

Russia’s war in Ukraine, for example, was still seen as adding to “elevated global uncertainty”, the Fed said. But policymakers dropped the language of earlier statements citing the war as well as the COVID-19 pandemic as direct contributors to rising prices.

Still, the Fed said the US economy was enjoying “modest growth” and “robust” job gains, with policymakers still “highly attentive to inflation risks”.

“The (Federal Open Market) 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 two per cent over time,” the Fed said.

The decision lifted the benchmark overnight interest rate to a range between 4.50 per cent and 4.75 per cent, a move widely anticipated by investors and flagged by US central bankers ahead of this week’s two-day policy session.

But, in keeping the promise of more rate hikes to come, the Fed pushed back against investor expectations that it was ready to flag the end of the current tightening cycle as a nod to the fact that inflation has been steadily declining for six months.

The statement did indicate that any future rate increases would be in quarter-percentage-point increments, dropping a reference to the “pace” of future increases and instead referring to the “extent” of rate changes.

But those, it said, would take into account how the policy moves so far had impacted the economy, language that linked further rate increases to the evolution of upcoming economic data.

The Fed hopes it can continue nudging inflation lower to its two per cent target without triggering a deep recession or causing a substantial rise in the unemployment rate from the current 3.5 per cent, a level rarely seen in recent decades. Inflation, based on the Fed’s preferred measure, slowed to a five per cent annual rate in December.

The US central bank did not issue new economic projections from its policymakers on Wednesday.

Fed Chair Jerome Powell was scheduled to hold a press conference at 2:30 pm EST (1930 GMT) to elaborate on the latest policy decision.


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