WASHINGTON: The Federal Reserve (Fed) slowed its pace of interest rate increases on Wednesday (Feb 1), tempering an aggressive campaign to rein in costs as inflation cools while signalling the battle is not yet over.
The US central bank announced a quarter-point increase to the benchmark lending rate at the end of its two-day policy meeting, taking the rate to a target range of 4.50-4.75%.
“Inflation has eased somewhat but remains elevated,” said the Fed’s policy-setting Federal Open Market Committee (FOMC) in a statement.
Officials will need “substantially more evidence” to be confident that inflation is on a sustained downward path, Fed chair Jerome Powell told a press briefing.
According to the FOMC statement, “the committee anticipates that ongoing increases in the target range will be appropriate” to bring inflation back to policymakers’ 2% target over time.
The Fed has cranked up interest rates eight times since March 2022, including four consecutive 0.75 percentage point increases, lifting borrowing costs in hopes of dampening demand.
The aim is to rein in inflation, which surged to its fastest pace in decades last year but has since come off a peak.
On Wednesday, the Fed acknowledged that recent indicators “point to modest growth in spending and production” as economic activity eases.
The 0.25 percentage point rise marks a step down from December’s half-point hike and the series of bigger spikes last year.
But the FOMC statement suggests that rate increases will continue.
The Fed statement indicated that any future rate increases would be in quarter-percentage-point increments, dropping a reference to the “pace” of future increases and instead referring to the “extent” of rate changes.
Fed policymakers hope the central bank can continue nudging inflation lower without triggering a deep recession or causing a substantial rise in unemployment.
The Fed did not issue new economic projections from its policymakers on Wednesday, but did reaffirm its commitment to its 2% average inflation target as part of its annual review of operating principles.
The Fed also stressed that officials are “highly attentive to inflation risks” amid fallout from Russia’s war against Ukraine, which is contributing to greater global uncertainty.
The Fed will want “concrete evidence that they’ve killed inflation, and they haven’t yet,” Ryan Sweet, chief US economist at Oxford Economics, told AFP.
While an easing of supply chain stress and shift in consumer spending from goods to services allows some costs to moderate, Sweet expects that services costs will keep the Fed on a “rate-hiking course.”
Powell noted on Wednesday that it will take a few more rate increases to get to an “appropriately restrictive” policy level while inflation runs hot.
And under current expectations, it “will not be appropriate to cut rates this year”, he said.
“We can now say for the first time that the disinflationary process has started,“ Powell told reporters after the end of the Fed’s latest two-day policy meeting, with goods prices slowing, pandemic-related shortages easing, and supply chains getting back 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 heading steadily in the right direction.
Yet “it’s just the early stages,“ Powell said. “We’re going to be cautious about declaring victory and ... sending signals that we think that the game is won, because we’ve got a long way to go.”
Important segments of the economy, including broad swaths of the service sector, have yet to see inflation slow, the Fed chief said, while a high level of job openings and still-strong wage increases showed the labour market was “extremely tight.”
“The labour market continues to be out of balance,“ Powell said, flagging the fact that Fed officials feel it is likely that the unemployment rate will need to rise from its current low level of 3.5% for inflation to complete the journey back to the 2% level.
“If you were hoping for clear signs of an upcoming pause in interest rate hikes, you were left wanting. The Federal Reserve retained the phrase ‘ongoing increases’ in their statement, leaving their options open depending on what upcoming economic data says,“ said Greg McBride, chief financial analyst at Bankrate.
Ian Shepherdson, chief economist of Pantheon Macroeconomics, argues it is time to pause the Fed’s rate increases, saying in a tweet Tuesday that “their work is done”.
“They have suppressed inflation expectations; the Covid distortions to rents and margins are working through and will drive inflation down,” he added.
“Every further Fed rate hike from here just increases the chance of an entirely unnecessary recession,” said Shepherdson. – AFP, Reuters