Federal Reserve Hikes Interest Rates by Half a Point, Reaching 15-Year High
On Wednesday, the Federal Reserve raised its benchmark interest rate to its highest level in 15 years, signaling that efforts to control inflation are far from over, even though there have been some positive signs recently.
In line with expectations, the Federal Open Market Committee increased the overnight borrowing rate by half a percentage point, bringing it to a target range of 4.25% to 4.5%. This hike comes after a series of aggressive three-quarter-point increases, marking the Fed’s most assertive action since the 1980s.
The Fed has indicated that rates will likely remain elevated through 2023, with no reductions expected until 2024. Officials project a terminal rate of 5.1%, according to the committee’s expectations. Although investors were initially disappointed by the possibility of prolonged high rates, Fed Chairman Jerome Powell emphasized the importance of continued efforts to manage inflation, warning that it would take more evidence before confirming a sustained downward trend in prices.
With the fed funds rate now at its highest point since December 2007, the Fed is raising rates in anticipation of a slow economy in 2023. Projections suggest that rates may continue to increase to a median of 5.1% next year before stabilizing. By 2024, a series of rate cuts is expected, eventually bringing the rate down to 4.1% and possibly even lower in 2025.
The Fed’s policies have been driven by persistently high inflation levels, which the central bank has been fighting with rate hikes since March. Despite some recent progress, inflation is still well above the Fed’s 2% target. Powell remains concerned about inflation in the services sector, indicating the possibility of even higher rates if necessary.
Despite higher borrowing costs, economic growth has been stronger than expected, with robust job growth and consumer spending holding up. However, inflationary pressures, driven by factors such as supply chain issues, energy price spikes due to Russia’s invasion of Ukraine, and a flood of pandemic-related stimulus, continue to challenge the economy.
As the Fed proceeds with quantitative tightening, allowing proceeds from maturing bonds to roll off its balance sheet, the balance sheet has shrunk by $332 billion since June.