Fed Slows Pace Of Interest Rate Hikes But Forecasts Higher Terminal Rate

After raising interest rates by three-quarters of a percentage point at four consecutive meetings, the Federal Reserve on Wednesday slowed the pace of rate increases but still signaled further rate hikes.

In a widely expected move, the Fed announced its decision to raise interest rates by 50 basis points, or half a percentage point, to a target range of 4.25 to 4.50 percent.

The text of the Fed’s accompanying statement was largely unchanged from last month, however, with the central bank reiterating that it anticipates ongoing increases in rates will be appropriate.

The economic projections provided along with the announcement also suggest the Fed expects rates to ultimately be raised higher than forecast back in September.

The median forecast suggests rates will be raised to a so-called terminal rate of 5.1 percent next year compared to the September projection of 4.6 percent.

The expectations for higher rates come as the Fed expects inflation to remain elevated in 2023, raising its forecasts for annual consumer price growth.

Consumer price growth is expected to slow to 3.1 percent next year from 5.6 percent this year, but that is still up from the 2.8 percent forecast in September and well above the Fed’s 2 percent target.

Potentially reflecting the impact of higher rates, the Fed’s forecast for GDP growth in 2023 was lowered to 0.5 percent from 1.2 percent in September.

Responding to the announcement, Ryan Sweet, Chief U.S. Economist at Oxford Economics, said the odds are increasing that the Fed will raise interest rates more than currently anticipated.

“There has been some good news on the inflation front, but the Fed can’t dampen the inflation attributed to supply-shocks because the target fed funds rate is a blunt instrument that impacts only the demand-side of the economy,” Sweet said.

He added, “This keeps the risk of a policy misstep high since the Fed needs to lean against the recent easing in financial market conditions.”

The Fed’s next monetary policy meeting is scheduled for January 31-February 1, with CME Group’s FedWatch Tool currently indicating a 47.7 percent chance of another 50 basis point rate increase and a 42.8 percent chance of 25 basis point rate hike.

In his post-meeting press conference, Fed Chair Jerome Powell said it will require “substantially more evidence” inflation is on a sustained downward trend, likely attracting even more attention to the inflation data due ahead of the next meeting.

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