(Bloomberg) — Federal Reserve Chairman Jerome Powell said officials were not close to ending their aggressive campaign of rate hikes after officials indicated borrowing costs would be higher than expected next year.
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“We still have some ways to go,” he said at a news conference in Washington on Wednesday after the central bank scaled back its rapid pace increases. He said the size of the rate hike passed at the Fed’s next meeting on Feb. 1 will depend on incoming data, leaving the door open for another half percentage point step or a step back to a quarter point .
“To restore price stability, restrictive policies will probably have to be maintained for some time,” he said.
The Federal Open Market Committee raised its benchmark rate by 50 basis points to a target range of 4.25% to 4.5%. Policymakers predicted rates would end at 5.1% next year, according to their median forecast, before being cut to 4.1% in 2024 – a higher level than previously stated.
“The committee expects that sustained increases in the target range will be appropriate to pursue monetary policy that is sufficiently restrictive to reduce inflation to 2% over time,” the FOMC said in its statement, citing it repeated the language it used in its statement. previous communications.
Treasury yields rose, the S&P 500 index fell, and the dollar index offset losses the day Powell spoke.
Investors had speculated that the Fed would soon pause its hikes after financial conditions eased. By Wednesday, stocks had risen while mortgage rates and the dollar had fallen since Powell suggested a policy change was imminent last month. They had also bet that interest rates would reach around 4.8% in May, followed by cuts totaling 50 basis points in the second half of the year.
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The vote was unanimous.
“It is our judgment today that we are not yet sufficiently restrictive in policy,” the Fed chief said. “We will stay on track until the job is done.”
Powell had previously signaled plans to moderate hikes while emphasizing that the pace of tightening is less important than the peak and duration of rates at a high level.
The decision follows four consecutive 75 basis point hikes that pushed interest rates at the fastest rate since Paul Volcker led the central bank in the 1980s.
Consumer price increases have begun with a more pronounced slowdown from their 40-year peak earlier this year. But a growing number of economists expect the Fed’s aggressive action to push the US into recession next year.
Such concerns have drawn criticism from the legislature, with Democratic Senators Elizabeth Warren, Bernie Sanders and Sheldon Whitehouse warning that rate hikes risk “bringing the economy to a standstill.”
Officials gave a clearer sign that they expect higher rates to affect the economy. They lowered their growth forecasts for 2023 and saw growth of 0.5%, according to median projections released on Wednesday. They raised their estimate for GDP in 2022 slightly to 0.5%. Central bankers raised their projection for next year’s unemployment rate to 4.6% from November’s level of 3.7%.
The distribution of rate forecasts also skewed higher, with seven of 19 officials seeing rates above 5.25% next year.
Fed officials raised their estimates for the key and core readings of their favorite inflation gauge, the personal consumer spending index. They now see the PCE at 3.1% in 2023, compared to a September estimate of 2.8%, while the core – excluding food and energy – may be 3.5% for next year.
Wednesday’s move caps off a challenging year for the US central bank, which was initially slow to tighten policy in response to rising price pressures.
Since the Fed raised rates from near zero in March, it has taken aggressive steps to catch up while keeping hopes of a soft landing that will prevent a dramatic rise in unemployment.
Officials are trying to slow growth below the long-term trend of cooling the labor market — with job openings still well above the number of unemployed Americans — and ease pressure on prices well above their 2% target.
Policymakers got some good news on Tuesday when government data showed consumer prices rose 7.1% in the year ended November, the lowest rate this year.
Still, Powell has said repeatedly that he’s willing to give the economy some pain to lower inflation and avoid the mistakes of the 1970s, when the Fed eased monetary policy prematurely.
–With assistance from Chris Middleton, Sophie Caronello, Liz Capo McCormick, Molly Smith, Jonnelle Marte, Matthew Boesler, and Craig Torres.
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