In a widely expected move, the Federal Reserve raised interest rates by a quarter of a point Wednesday, while reiterating its commitment to bringing inflation down to pre-pandemic levels.
The hike of 25 basis points follows a half-point increase in December after four straight 75-basis-point increases in prior months. It suggests the Fed is nearing the end of its aggressive cycle of monetary tightening, although it may well pause for a while rather than cut interest rates this year.
The short statement announcing the move included a hint at likely future increases in interest rates as well as an acknowledgement of the need to be sensitive to incoming economic data.
“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 percent over time,” the statement said in what might be interpreted as a hawkish tone.
But, in a nod to the dovish market sentiment that senses an end to the Fed’s hikes, the statement continued: “In determining the extent of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”
Speaking to reporters after the announcement, Fed Chairman Jerome Powell said he is heartened by recent improvement in inflation, especially in the goods sector of the economy, and that “it is a good thing that the disinflation that we have seen so far has not come at the expense of the labor market.” But he noted the economy was still in an “early stage” of easing inflation.
Powell also said he has yet to see disinflation in the core services sector, which excludes housing. “And it’s our judgment that we’re not yet at a sufficiently restrictive policy stance, which is why we say that we expect ongoing hikes,” he said.
The Fed is confronting an unusual economy that is clearly slowing in the face of higher borrowing costs yet has seen an unusually strong labor market. That was confirmed earlier Wednesday when the Labor Department said there were 11 million jobs open at the end of December, well above the 10.3 million that had been expected.
Even as layoffs have grabbed headlines recently, the rate of such departures during 2022 was below the levels seen in 2018 and 2019, prior to the arrival of the coronavirus in 2020. And some experts believe the job opening numbers may be lagging other indicators.
“Job openings surged in December, fueled by growth in small and mid-sized business openings,” said Julia Pollak, chief economist at Zip Recruiter. “That increase is somewhat puzzling and stands in stark contrast to Federal Reserve bank data on business hiring plans and other labor market leading indicators.”
“It is our belief that the current number of job openings, as measured by the Bureau of Labor Statistics, vastly overstates the current strength and tightness of the labor market,” Pollak added. “Hires and online job postings have undergone a slow renormalization in recent months that is not yet reflected in job openings.”
The health of the labor market is one of the key factors the Fed uses in deciding its policy on interest rates. Another is inflation, which has been easing of late and trending in the right direction, though it is nowhere near the 2% annual target the Fed has set as its goal.
The markets have bought into a scenario where inflation comes down without the job market seeing a significant increase in unemployment, which has matched a 53-year low at 3.5%. But some have cautioned that investors are doubting the Fed’s resolve to keep interest rates at a higher level for longer.
“The market is certainly more optimistic (that) we are nearing the end game,” says Russell Price, chief economist at Ameriprise Financial.
Other indicators, such as manufacturing activity and consumer spending, are showing a contraction in the economy.
“The economic data is coming in negative,” says Massud Ghaussy, senior analyst for Nasdaq IR Intelligence. “Earnings estimates continue to get revised down.”
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