The Federal Reserve unanimously approved a quarter-point increase in interest rates on Wednesday, slowing the pace of increases, a clear sign that the central bank is making progress in its fierce battle against inflation.
The decision comes at the end of the Federal Open Market Committee’s first meeting in 2023, after months of steep rate hikes aimed at cooling the economy, and marks a return to more traditional interest rate policy.
Since the Federal Reserve’s last meeting in December, two economic trends suggest the central bank’s mission to cool the economy and stop rising prices is working: encouraging recent data on wage growth and inflation, and worrying economic growth signals. has been The prices of many goods that consumers used during the pandemic have begun to fall now that consumer demand has shifted to services. Energy costs have also decreased and the housing market has decreased.
Federal Reserve officials pointed to these trends in a statement on Wednesday, writing that “inflation has eased somewhat but remains high.”
And while Fed officials are easing interest rate hikes after months of unusually aggressive action, the central bank is far from declaring victory.
In his post-meeting press conference, Federal Reserve Chairman Jerome Powell indicated that while there is still a long way to go to fight inflation, he believes the process is moving in the right direction.
However, Powell warned economic observers that “the job is not quite done” and that the job market is too tight for him. He said it was “very early” to think “we’ve actually got this,” adding that he didn’t expect to cut rates this year unless the economic trajectory changed dramatically.
Wednesday’s statement included language that made it clear that policymakers expect more hikes will be needed to bring down inflation. “The Committee anticipates that continued increases in the target range will be appropriate to achieve a monetary policy stance that is sufficiently restrictive to bring inflation back to 2 percent over time,” they wrote. The “magnitude” of these “future increases” will depend on a number of economic and financial factors, they said.
While these trends could slow rate hikes after months of unusually aggressive action, the central bank is far from declaring victory. It takes time for monetary policy to become effective and balance supply and demand. Senior Fed officials such as Vice Chairman Lael Brainard and Governor Christopher Waller have stressed in recent weeks the need to see six months of positive data before stopping hiking rates.
Powell echoed that sentiment on Wednesday, saying, “I still think it’s very difficult to manage the risk of underperforming, and in six or 12 months we realize we were really close but we didn’t get the job done.”
US markets bounced after the press conference, suggesting investors expect the US Federal Reserve to hike further. The S&P 500 closed 1.1% higher on February 1 after posting its best January in four years.