Fed slows pace of rate hikes as inflation cools

The Federal Reserve dialed back the pace of its inflation-fighting effort on Wednesday as officials seek a delicate balance between taming prices and avoiding a sharp recession.

The rate-making Federal Open Market Committee hiked its benchmark interest rate by a half percentage point following a two-day meeting.

The hike moved the federal funds rate’s target range to between 4.25% and 4.50% — its highest since December 2007. The FOMC said it foresees “ongoing increases will be appropriate” in future meetings.

During his post-meeting press conference, Fed Chair Jerome Powell pushed back on concerns that the window for an economic “soft landing” has closed.

“I wouldn’t say that. No, I don’t say that,” Powell said. “To the extent we need to keep rates higher and keep them there for longer and inflation moves up higher and higher, that narrows the runway. But lower inflation ratings, if they persist, in time could make it more possible.”

Powell said officials have yet to make a decision on the size of the rate hike expected at the Fed’s next meeting on Feb. 1.

“It’s now not so important how fast we go,” Powell said. “It’s far more important to think, what is the ultimate level and then, at a certain point, the question will become how long do we remain restrictive.”

Policymakers also released updated projections showing they expect the funds rate to hit a peak of 5.1% next year – higher than they had previously signaled – before dropping down to 4.1% the following year and 3.1% by 2025.

Officials also expect their rate hikes to result in job losses, driving the national unemployment rate to 4.6% by next year – up from its current level of 3.7%.

Prior to the Fed’s announcement, the market expected the benchmark rate to peak just below 5% in March.

Stocks dropped sharply after the Fed’s announcement, with the Dow Jones Industrial Average suffering a nearly 400-point turnaround. The index was up about 250 points before the 2 p.m. announcement but closed down 142.29 points, or 0.4%.

The Fed’s decision came one day after the latest Consumer Price Index showed prices rose 7.1% in November – the slowest pace in a year. On a monthly basis, inflation rose just 0.1% from October to November.

Recent inflation data shows “a welcome reduction in the monthly pace of price increases, but it will take substantially more evidence to give confidence that inflation is on a sustained downward path,” Powell said.

The half-point hike marked a slowdown for the Fed, which had implemented supercharged three-quarter-point increases at four consecutive policy meetings through November.

However, the latest hike marked just the fifth time in the last 22 years the Fed has raised rates by more than a quarter percentage point. All five instances have occurred this year.

The smaller hike could assuage concerns among business leaders and investors who have grown increasingly fearful that the Fed will drive the economy into a steep recession through ongoing interest rates hikes. Uncertainty about the Fed’s policy path has stoked volatility in the stock market for months.

Powell pushed back on concerns that a recession was underway, noting the Fed’s projections point to “positive growth,” albeit at a much slower rate than the rapid gains seen in the economy last year.

The chair said the labor market remains strong despite internal projections signaling a higher unemployment rate.

“The reports we get from the field is that companies are very reluctant to lay people off,” Powell said.

The smaller increase was widely expected among investors. Ahead of the Fed’s announcement, the market was pricing in an 82% probability of a half-point increase and just an 18% probability of a larger three-quarter percentage point hike.

During a speech in late November, Powell signaled signaled the central back could slow the pace of its policy tightening effort by as soon as December. He also acknowledged that the Fed would likely need to lift rates higher than officials initially expected to bring inflation back down to the 2% target level.

The Fed’s policy actions affect nearly every element of the broader economy, affecting credit card interest rates, auto loans, savings accounts, and more.  They also have an indirect but significant effect on mortgage rates, which have more than doubled this year.

The torrid pace of hikes this year have caused a rapid cooling in the US housing market. Home sales volume has cratered, while experts have warned that prices could fall by 20% from their recent peaks.

Billionaire Elon Musk and JPMorgan Chase boss Jamie Dimon were among those who have called out a potential recession risk associated with interest rate hikes.

Last week, Musk warned that an economic recession “will be greatly amplified” if policymakers moved forward with another rate hike.

Treasury Secretary Janet Yellen, who had long downplayed the likelihood of a recession, acknowledged last Sunday that she saw a “risk” of a downturn in the months ahead.