The Fed raises the key rate by a half-point and signals what’s to come

WASHINGTON (AP) — The Federal Reserve on Wednesday stepped up its inflation fight by raising its key interest rate for the seventh time this year and hinting at a hike to come. But it announced a smaller hike than in its past four meetings at a time when inflation was showing signs of easing.

In a statement and news conference from Chairman Jerome Powell, the Fed made clear that even higher rates are needed to fully contain the worst inflation to hit the economy in four decades.

The central bank raised its benchmark rate by a half-point to 4.25% to 4.5%, the highest level in 15 years. Although less than its previous three-quarter point hikes, the latest move will raise the cost of many consumer and business loans and raise the risk of a further recession.

Even more surprising, policymakers forecast their key short-term rate to be between 5% and 5.25% by the end of 2023. This means the central bank is poised to raise rates by an additional three-quarters of a point and leave them there until next year. Some economists had expected the central bank to expect only an additional half-point increase.

The latest rate hike was announced a day after an encouraging report showed inflation The U.S. fell for the fifth straight month in November. The 7.1% year-over-year increase, while still high, was below the recent peak of 9.1% in June.

“Inflation data for October and November show a welcome slowdown,” Powell said at his press conference. “But to believe that inflation is on a steady downward path would require substantial additional evidence.”

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In its updated projections, the central bank’s policymakers forecast slower growth and higher unemployment next year and in 2024. The unemployment rate is expected to rise from 3.7% today to 4.6% by the end of 2023. This would mean a significant increase in unemployment, which would usually reflect a recession.

Consistent with a sharp slowdown, officials forecast the economy will grow barely next year, expanding just 0.5%, less than half of what it forecast in September.

In recent weeks, central bank officials have indicated they are seeing some evidence of progress in their drive to beat the worst inflation in four decades and bring inflation back to their annual target of 2%. For example, there is a national average for a gallon of regular gas It fell from $5 to $3.21 in June.

Many supply chains are no longer clogged, thus helping to lower commodity prices. Inflation data for November showed that prices of used cars, furniture and toys all fell last month, better than expected.

So are the costs of services from hotels to flights to car rentals. Rents and home prices are falling, though those declines have yet to feed into government data.

The Fed’s closer gauge of tracks — “core” prices, excluding volatile food and energy costs for a clearer snapshot of core inflation — rose slightly for the second consecutive month.

Inflation has eased slightly in Europe as well And in the United Kingdom, leading analysts expect the European Central Bank and Bank of England to cut rate hikes at Thursday’s meetings. Both are expected to raise rates by half a point to target an even more painfully high rate of inflation after a big three-quarter-point increase..

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Inflation has fallen to 10% in the 19 countries that use the euro currency. This was the first decline since June 2021, down from 10.6% in October. The rate is well above the bank’s 2% target, and rate hikes are expected to continue next year. Inflation in Britain has also fallen It was 10.7% in November, down from a 41-year high of 11.1% in October.

Many economists think the Fed will cut further to a quarter-point rate hike when it meets early next year. Asked about that Wednesday, Powell said he had not yet decided how big the next hike should be. But having raised rates so quickly, “we think the appropriate thing to do now is to move slowly. It will allow us to feel our way.”

Powell downplayed any suggestion that the Fed might reverse course next year and start cutting rates to support growth, as Wall Street investors expect.

“I don’t see the committee cutting rates until we believe inflation is moving down in a sustainable way,” he said.

Overall, the Fed’s hikes have led to more expensive borrowing rates for consumers and businesses, from mortgages to auto and business loans. They have sent home sales down sharply New flats have started to weigh on rents, a major source of high inflation.

Fed officials have said they want rates to reach “containment” levels that would keep growth and hiring and inflation down to their target range. Concerns have grown that the central bank is raising rates too high in a push to control recession-triggering inflation next year.

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Policymakers have emphasized that how long they keep rates at or near their peak is more important than how fast they raise them.

“It’s really important to think about what the end point is,” Powell said Wednesday.

Powell’s biggest focus is on prices for services, which he said will continue to be high. In part, sharp increases in wages are becoming a major contributor to inflation. Service industries such as hotels and restaurants are particularly labor intensive. And average wages are rising

With many service sector employers still desperate for workers, Powell said wage growth may be more than consistent with the central bank’s 2% inflation target.

“We have a long way to go to achieve price stability,” the Fed chief said.

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AP business writer David McHugh contributed to this report from Frankfurt, Germany.

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