The Federal Reserve (FED) ended the year by raising its benchmark interest rate to a 15-year high, suggesting that the fight against inflation is far from over despite some promising signs recently.
As expected, the Federal Open Market Committee (FOMC), which sets the interest rate, voted two days after its meeting to boost the overnight borrowing rate by 50 basis points, bringing it to a target range between 4.25 percent and 4.5 percent.
The increase follows four consecutive 75 basis point hikes, the most aggressive political moves since the early eighties.
Along with the increase, there was a sign that Federal Reserve officials expect to keep interest rates higher over the next year, with no cuts until 2024. The expected “final rate,” or the point at which officials expect to end the rate hike, is set at 5.1 percent, according to the FOMC “point chart” of members’ expectations.
Read more: Powell warns of ‘some pain’ ahead as Fed struggles to bring down inflation
Investors initially reacted negatively to the expectation that rates could stay higher for longer, and stocks gave up their previous gains.
During a press conference, Federal Reserve Chairman Jerome Powell said it was important to continue the fight against inflation so that expectations of higher prices do not take hold.
He said it was too early to talk about the bank cutting interest rates.
“The inflation data received so far for October and November show a welcome decline in the pace of monthly price increases… “But it takes significantly more evidence to be confident that inflation is on a sustained downward trajectory.”
Powell stressed that the central bank is not considering any change to its inflation target of two percent and does not intend to consider doing so in the future and “we will use our tools to return inflation to two percent.”
The new level marks the highest rate on federal funds since December 2007, just before the global financial crisis, when the Fed aggressively adopted an easing policy to combat what could turn into the worst economic slowdown since the Great Depression.
This time, the Federal Reserve is raising interest rates to what is expected to be a moribund economy in 2023.
FOMC members have begun to increase the money rate to an average level of 5.1 percent next year, equivalent to a target range of 5 percent-5.25 percent At this point, officials are likely to pause to allow the impact of monetary tightening to make its way through the economy.
Remarkably, there has been a fairly wide dispersion in the outlook for the coming years, suggesting that members are unsure of what to expect in an economy dealing with its worst inflation since the early eighties.
The FOMC policy statement, which was unanimously approved, was almost unchanged from the November meeting.
Federal Reserve officials believe that raising interest rates helps get money out of the economy, reduces demand, and ultimately pushes prices lower after inflation rose to its highest level in more than 40 years.
Read more on the global economy here.
