US Fed delivers small 25 bps rate hike, sees ‘ongoing increases’ as inflation fight not over
THE Federal Reserve raised its target interest rate by a quarter of a percentage point on Wednesday (Feb 1), but promised “ongoing increases” in borrowing costs as part of its still-unresolved battle against inflation.
“Inflation has eased somewhat but remains elevated,” the US central bank said, explicitly acknowledging the progress made in lowering the pace of price increases from 2022’s four-decade highs.
Russia’s war in Ukraine, for example, was still seen as adding to “elevated global uncertainty”, the Fed said. But policymakers dropped the language of earlier statements, which cited the war and Covid-19 pandemic as direct contributors to rising prices. For the first time since March 2020, they omitted mention of the global health crisis.
Still, the Fed said the US economy was enjoying “modest growth” and “robust” job gains, with policymakers still “highly attentive to inflation risks”.
“The (Federal Open Market) 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 per cent over time,” it said.
Fed chairperson Jerome Powell wasted little time emphasising that recent progress on inflation, while “gratifying”, was still insufficient to signal an end to the rate hikes.
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“We will need substantially more evidence that inflation is ebbing to be confident that it’s moving back toward the target,” he said at a news conference following the end of the two-day policy meeting.
That said, Powell said he believed there was a path back to the Fed’s 2 per cent inflation target without a significant economic downturn. He added that the central bank could be only “a couple of more rate hikes” from the level it deems is sufficiently restrictive to bring inflation down.
Stocks, modestly lower ahead of the Fed rate decision, turned sharply higher as Powell spoke, with the benchmark S&P 500 index climbing about 1 per cent on the session.
At the same time, the yield on the 2-year Treasury note , the maturity most sensitive to Fed policy expectations, dropped abruptly to the day’s low, last trading down about 8 basis points at around 4.12 per cent. The US dollar slid against a basket of major trading partner currencies.
“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,” said Greg McBride, chief financial analyst at Bankrate.
Inflation target reaffirmed
The Fed’s policy decision lifted the benchmark overnight interest rate to a range between 4.50 per cent and 4.75 per cent, a move widely anticipated by investors and flagged by US central bankers ahead of the meeting.
But in keeping the promise of more rate hikes to come, the Fed pushed back against investor expectations that it was ready to flag the end of the current tightening cycle as a nod to the fact that inflation has been steadily declining for six months.
The statement did indicate that any future rate increases would be in quarter-percentage-point increments, dropping a reference to the “pace” of future increases and instead referring to the “extent” of rate changes.
But those, it said, would take into account how the policy moves so far had impacted the economy, language that linked further rate increases to the evolution of upcoming economic data.
The Fed hopes it can continue nudging inflation lower to its 2 per cent target without triggering a deep recession or causing a substantial rise in the unemployment rate from the current 3.5 per cent, a level rarely seen in recent decades.
Inflation, based on the Fed’s preferred measure, slowed to a 5 per cent annual rate in December.
The US central bank did not issue new economic projections from its policymakers on Wednesday but did reaffirm its commitment to its 2 per cent average inflation target as part of its annual review of operating principles. REUTERS
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