Fed Hikes Interest Rates To Highest Levels In 15 Years

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The Federal Reserve raised its target federal-funds interest rate by a quarter percentage point Wednesday, the slowest in a series of eight hikes that began in March 2022.

The hike brings the Fed’s target rate to a range between 4.5% and 4.75%, with the Fed continuing to slow its pace after six consecutive hikes of more than 0.5 percentage points, according to a Fed press release. While Fed officials have consistently said that they anticipated a pause after the target funds rate surpassed 5%, investors have increasingly expected that the Fed will change its tune by its next meeting — scheduled for May 2-3, 2023 —if inflation continues to drop, Bloomberg reported.

The disconnect between the Fed and investor expectations has put Fed officials in a “difficult spot,” Will Luther, the director of the American Institute of Economic Research’s Sound Money Project, told the Daily Caller News Foundation. “Fed officials can either meet expectations where they are, which might mean they fail to bring down inflation as quickly as they would like, or surprise markets by delivering the projected rate hikes, which would bring down inflation but at the risk of a potentially severe recession.”

Current market expectations for path of the Fed Funds Rate…
-Feb 1, 2023: 25 bps hike to 4.50%-4.75%.
-Mar 22, 2023: 25 bps hike to 4.75%-5.00%.
-Pause.
-Rate cuts start in Nov 2023 and continue throughout 2024 with Fed Funds Rate moving back below 3%. pic.twitter.com/rCvx6uu2cn

— Charlie Bilello (@charliebilello) January 25, 2023

Since last March, the Fed has noted that there would be “ongoing increases” in its policy statements following each rate hike, indicating to investors that further hikes were still more hikes to come, Reuters reported. In its policy statementWednesday, the Fed did use this phrase, but also noted that “prepared to adjust the stance of monetary policy as appropriate.”

“While the February rate hike was highly anticipated, it is much harder to predict how high the Federal Reserve will raise its federal funds rate target going forward,” Luther told the DCNF. “In December, the median FOMC member projected the federal funds rate would exceed five percent in 2023. With inflation coming down quickly, and Fed officials still keen to engineer a softish landing, they may ease up sooner than previously projected.”

Federal Reserve chair Jerome Powell has said that there will be some loosening of the historically tight labor market as a result of the Fed’s rate hikes reducing economic demand, bumping the unemployment rate to roughly 4.5% from its current levels near 3.5%. Elevated interest rates have also contributed to reduced consumer demand, higher credit card rates, car loan delinquency, and expensive mortgages.

Interest rates “would likely be higher” than they are now if they were set by market forces as opposed to the Fed, Joel Griffith, economist at the Heritage Foundation told the DCNF. Interest rates remain well below the overall inflation rate of 6.5% as measured by the Consumer Price Index, and pull just ahead of the core inflation rate of 4.4% as measured by the Personal Consumption Expenditures Price Index.

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