February 3, 2023: On Wednesday, the Federal Reserve raised its benchmark interest rate by a quarter percentage point, giving little indication that it is closer to the end of this hiking cycle.
Aligning with market anticipations, the rate-setting Federal Open Market Committee improved the federal funds rate by 0.25 percentage points. That takes it to a target price of 4.5%-4.75%, the highest since October 2007.
The move shows the eighth increase in a process that started in March 2022. By itself, the fund’s rate sets what banks deal with each other for overnight borrowing, but it spills through to many consumer debt products.
The Fed targets the hikes to decrease inflation that, despite the latest signs of slowing, is still going on near its highest level since the early 1980s.
The post-meeting noted that inflation “has eased somewhat but remains elevated,” a tweak on the previous language.
“Inflation data received in the past three months show a welcome reduction in the monthly speed of increases,” Fed Chairman Jerome Powell stated in his post-meeting news conference. “While recent developments are encouraging, we need substantial evidence to be confident that the zooming is on a sustained below path.”
Markets, thus, to this week’s conference for signs that the Fed would be ending the rate prices soon. But the statement provided no such signals. At first, stocks decreased in the wake of the discussions, with the Dow Jones Industrial Average tumbling over 300 points.
However, the market rebounded in Powell’s press conference after he stated that “the disinflationary process” had begun. Major averages changed positively as market commentary focused on Powell’s somewhat optimistic statements on progress against inflation.
“We can say, I think, for the initial time that the disinflationary process has begun,” Powell stated, which notes that it would be “very premature to show victory or to think we got this.”
The Fed’s talks included language noting that the FOMC still needs an “ongoing surge in the target range.” Market participants had been hoping for softening of the phrase, but the statement approved kept it intact.
The statement altered one part by stating what would determine the future policy path.
Officials said they are determining the “extent” of future rate increases based on factors like the effects so far of the rate increase, the lags in which policy has an impact, and arrangements in financial conditions and the economy. Previously, the deal said it would use those factors to determine the “speed” of future hikes. It is a possible nod that the committee sees finishing to the increases somewhere or at least a continuation of smaller moves ahead.