By Howard Schneider and Ann Saphir
WASHINGTON (RockedBuzz via Reuters) – The Federal Reserve said on Wednesday it had made a breakthrough in the fight against high inflation, but that “winning” would still require its benchmark overnight interest rate to be raised further and remain elevated until at least 2023.
In announcing its latest policy decision, the US central bank returned to a quarter-percentage point rate hike after a year of higher hikes and in its statement brushed aside the long list of reasons, from war to pandemic, who were pushing prices higher to simply say “inflation is down”.
However, policymakers also predicted that “continuous hikes” in borrowing costs would be needed, an as yet open-ended commitment that has not yet pinpointed when rate hikes might stop and rejected the expectation in financial markets that the Fed it would soon stop and, indeed, cut rates by the end of the year.
However, investors took a cue from comments from Fed Chairman Jerome Powell, who repeatedly referred to the “disinflationary” process that now appeared to be underway during a press conference. Stock markets rallied as Powell spoke and investors slightly increased their bets for upcoming rate cuts.
Meanwhile, Powell has insisted that rate cuts are not in sight and has taken care to walk what has become an increasingly fine line between the stream of data showing steadily falling inflation and the need to keep the public and investors in tune with the fact that interest rates will continue to rise.
“Now we can say for the first time that the disinflationary process has begun,” Powell told reporters after the Fed’s latest two-day policy meeting ended, as asset prices eased, inflation-related shortages eased pandemic and supply chains returning to normal. “This is a good thing.”
From a peak of nearly 7% in June, the Fed’s preferred measure of inflation was 5% in December, still well above its 2% target, but it’s consistently heading in the right direction.
Yet “it’s just the early stages,” Powell said. “We will be wary of declaring victory and… sending signals that we think the game is won, because we still have a long way to go.”
Important segments of the economy, including large swathes of the services sector, have yet to see inflation ease, the Fed chief said, while a high level of jobs and still strong wage increases showed the job market was buoyant. “extremely tense”.
“The job market continues to be unbalanced,” Powell said, signaling that Fed officials think it likely that the unemployment rate will need to rise from its current low of 3.5% for inflation to complete its journey. back to the 2% level.
The Fed’s statement on Wednesday marked its first explicit acknowledgment of slowing inflation after a year in which prices rose much faster than expected, prompting a series of rapid rate hikes of three-quarters of a percentage point and a half-point percentage to match the outbreak of the price increase.
Dynamics that the Fed over the past year said were driving prices up, including the pandemic, were either dismissed from the statement altogether or, in the case of the Ukraine war, only cited as a source of “global uncertainty” rather than inflation .
Fed-mandated rate hikes since March have now totaled 4.5 percentage points, with the policy rate now in a range of 4.50% to 4.75%, the highest since 2007. .
The full impact of that monetary policy tightening has yet to be felt in the economy, but so far it has been absorbed without derailing the “modest” economic growth and “robust” job gains the Fed cited in its latest statement.
It is partly that resilience that has the central bank ready for “continuous hikes” in its official interest rate.
With inflation still high and demand in the economy stronger than many expected, Powell said it wasn’t clear how far they would need to raise rates. In December, Fed policymakers projected a top official rate in the range of 5.00% to 5.25%, in line with what Powell said, incidentally during his press conference, that it likely there would be “a couple” more rate hikes.
Stocks, which had been slightly down before the Fed’s rate decision, turned sharply higher when Powell spoke. The benchmark S&P 500 index finished the day with a gain of just over 1%.
At the same time, the yield on the 2-year Treasury note, the most sensitive maturity to Fed policy expectations, fell sharply and fell more than 10 basis points to 4.10%. The US dollar slipped against a basket of major trading partner currencies.
“If you were hoping for clear signs of an imminent pause in interest rate hikes, you didn’t want to. The Federal Reserve kept the phrase ‘continuing hikes’ in its statement, leaving their options open depending on what the upcoming economic data,” said Greg McBride, chief financial analyst at Bankrate.
INFLATION TARGET REAFFIRMED
The Fed statement indicated that any future rate hikes would be in increments of a quarter of a percentage point, eliminating a reference to the “pace” of future hikes and referring instead to the “measure” of rate changes.
Fed policymakers hope the central bank can continue to push inflation lower without triggering a deep recession or causing a substantial rise in unemployment.
The Fed did not issue new economic projections from its policy makers on Wednesday but reaffirmed its commitment to its 2% average inflation target as part of its annual review of operating standards.
(Reporting by Howard Schneider; Additional reporting by Ann Saphir and Michael S. Derby; Editing by Paul Simao)