Fed drops to half a point hike, sees 5.1% rate next year

(Bloomberg) — The Federal Reserve slowed its rapid pace of interest rate hikes by signaling that borrowing costs, now the highest since 2007, will exceed investor expectations as the central bank works to curb inflation.

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The Federal Open Market Committee raised its key rate by 50 basis points to a target range of 4.25% to 4.5%. According to their median forecast, rates expected by policymakers will end next year at 5.1%, before being cut to 4.1% in 2024, a higher level than previously indicated.

“The committee expects that continued increases in the target range will be appropriate in order to achieve a monetary policy stance tight enough to bring inflation back to 2% over time,” the FOMC said in its statement, repeating the language it used in previous communications.

Following the hawkish projections, Treasury yields increased, the S&P 500 fell and the dollar index trimmed losses during the day.

Investors had speculated that the Fed would soon suspend its hikes as financial conditions eased. Through Wednesday, stocks had risen, while mortgage rates and the dollar had fallen since Powell last month suggested a policy change was coming. They are also betting that rates will hit around 4.8% in May, followed by cuts totaling 50 basis points in the second half of the year.

Click here for Bloomberg’s TOPLive blog on the Fed decision and press conference

The vote was unanimous.

Fed Chairman Jerome Powell, who is giving a press conference at 2.30pm in Washington, had previously signaled his intention to moderate the hikes, while emphasizing that the pace of the tightening is less significant than the peak and the duration of rates at a level high.

The decision follows four consecutive 75 basis point hikes that raised rates at the fastest pace since Paul Volcker led the central bank in the 1980s.

Consumer price increases began a more pronounced slowdown from their 40-year highs earlier this year. But a growing group of economists expect aggressive Fed action to drive the US into a recession next year.

Those concerns have drawn criticism from lawmakers, with Democratic Senators Elizabeth Warren, Bernie Sanders and Sheldon Whitehouse warning that rate hikes risk “slowing the economy to a crawl.”

Officials have given a clearer signal that they expect higher rates to impact the economy. They cut their 2023 growth forecast, seeing a 0.5% expansion, according to median projections released Wednesday. They raised their estimate for 2022 GDP slightly to 0.5%. Central bankers raised their projection for next year’s unemployment rate to 4.6% from November’s level of 3.7%.

The distribution of rate forecasts was also higher, with seven out of 19 officials seeing rates above 5.25% next year.

Fed officials raised their estimates for the headline and fundamental readings of their favorite inflation gauge, the Personal Consumption Spending Index. They now see PCE at 3.1% in 2023 versus a September estimate of 2.8%, while core – which excludes food and energy – could be 3.5% for next year.

Wednesday’s move caps off a difficult year for the US central bank, which was initially slow to start tightening policy in response to mounting price pressures.

After raising rates from near zero in March, the Fed moved aggressively to catch up, retaining hope that it could deliver a soft landing that avoids a dramatic rise in unemployment.

Officials are trying to slow growth below its long-term trend to cool the job market — with job vacancies still far above the number of American jobless — and ease pressure on prices that are well below above their 2% target.

Politicians received good news on Tuesday as government data showed consumer prices rose 7.1% in the year to November, the lowest rate this year.

Even so, Powell has repeatedly said he is willing to make the economy suffer to lower inflation and avoid the mistakes of the 1970s, when the Fed prematurely eased monetary policy.

–With assistance from Chris Middleton, Sophie Caronello, Liz Capo McCormick and Molly Smith.

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