On Wed., Feb. 1, 2023, The Federal Reserve raised interest rates by 25 percentage points.
Although the latest interest rate increase is much smaller than the 50 percentage point increase in December 2022 and the four back-to-back 75 percentage point increases earlier in 2022, interest rates now range between 4.50 percent and 4.75 percent, the highest they’ve been since 2007.
Given interest rates were near 0 percent in March 2022, the roughly 4.50 percent increase in interest rates is reflected in an array of consumer borrowing costs, from credit card debt to home mortgages to car loans.
The Federal Reserve said it had turned a key corner in the fight against high inflation, noting that inflation had decreased from a peak of 7 percent in June 2022 to 5 percent in December 2022. However, Fed Chair Jerome Powell noted that The Fed’s “victory” of 2 percent inflation would still require further interest rate increases.
“We can now say for the first time that the disinflationary process has started,” Powell told reporters, noting that goods prices are slowing, pandemic-related shortages are easing, and supply chains are returning to normal. “This is a good thing.”
Yet “it’s just the early stages,” Powell said. “We’re going to be cautious about declaring victory and … sending signals that we think that the game is won, because we’ve got a long way to go.”
In other words, no clear indication from any of The Fed’s policymakers on when the rate hikes might stop or even cut interest rates.
“If you were hoping for clear signs of an upcoming pause in interest rate hikes, you were left wanting. The Federal Reserve retained the phrase ‘ongoing increases’ in their statement, leaving their options open depending on what upcoming economic data says,” Greg McBride, chief financial analyst at Bankrate told Reuters.
Powell instead reaffirmed that The Fed expects to deliver a “couple” more interest-rate increases or until the inflation rate is at 2 percent.
In its December 2022 meeting, Fed policymakers projected interest rates would likely increase somewhere between 5.00 percent and 5.25 percent to reduce inflation to 2 percent.
“My colleagues and I are acutely aware that high inflation imposes significant hardship as it erodes purchasing power, especially for those least able to meet the higher costs of essentials like food, housing, and transportation. We are highly attentive to the risks that inflation poses to both sides of our mandate, and we are strongly committed to returning inflation to our 2 percent objective,” Powell said in prepared remarks.
He added that “while recent developments are encouraging, we will need substantially more evidence to be confident that inflation is on a sustained downward path.”
Although The Fed declined to comment on when interest rate increases would end or when The Fed believed it might be time to reduce interest rates, Powell acknowledged he is aware the interest rate increases have begun to impact consumers’ ability to afford various items.
“We are seeing the effects of our policy actions on demand in the most interest-sensitive sectors of the economy, particularly housing. Activity in the housing sector continues to weaken, largely reflecting higher mortgage rates. Higher interest rates and slower output growth also appear to be weighing on business fixed investments,” Powell acknowledged.
Powell reiterated that although The Fed doesn’t have plans to halt interest rate increases any time soon, they expect to raise interest rates at a slower pace than in 2022.
“Shifting to a slower pace will better allow the Committee to assess the economy’s progress toward our goals as we determine the extent of future increases that will be required to attain a sufficiently restrictive stance,” Powell said. “We will continue to make our decisions meeting by meeting, taking into account the totality of incoming data and their implications for the outlook for economic activity and inflation.”