Fed in line with expectations, signals further rate hikes

The Federal Reserve raised interest rate by 25 basis points in Jan 31/Feb1 policy meeting, in line with wide expectations for further easing of the pace of tightening, after a number of larger hikes in 2022.

The central bank’s latest action pushed the interest rate from the levels near zero in March last year to a current 4.50%/4.75% range, the highest since 2007, with stronger impact of the monetary policy to the economy yet to be seen, although inflation is already in the downward trajectory and eased to 5% in December after peaking at near 7% in June, but a lot of work still required to push it to Fed’s 2% target.

The past actions in fighting high inflation have registered a partial success, but the policymakers said that more evidence of easing inflation is needed and signaled further rate hikes, with the borrowing cost expected to remain elevated during 2023 to achieve full success in curbing inflationary pressures.

This opened a number of questions about the stop of policy tightening as the Fed highlighted positive signals from easing goods prices and shortages, while supply chains shortages are fading.

Fed Chair Powell said that disinflationary process has started but stressed that the fight against inflation is still far from the end, and it would be too early to declare victory at this stage.

The central bank’s statement of the last policy meeting for the first time acknowledged that inflation is slowing, after accelerating above expectations last year that triggered Fed’s aggressive approach to the monetary policy tightening, resulting in four straight jumbo rate hikes by 75 basis points and some 50 and 25 basis points hikes.

The Fed also pointed to a modest economic growth despite still elevated inflation and high borrowing cost but said that it is still unclear how much higher will rates need to rise, with the latest projections showing the rates will peak at a range of 5.00%/5.25%.