On 1 February, the U.S. Federal Reserve raised its key federal funds interest rate by a quarter point, the seventh and smallest hike since May 2022.
The quarter-point increase was widely expected.
The Fed’s rate-setting committee made a minimal increase to see how the economy is reacting to the steady stream of hikes that have taken the rate from 0.25 percent last March to between 4.50 and 4.75 percent now, the highest since 2007, analysts told The Wall Street Journal.
“We can now say for the first time that the disinflationary process has started,” Powell said in a press briefing following the Open Market Committee’s meeting. “We can see it in goods prices so far.”
Inflation is easing because supply lines are untangling, he said.
Wage inflation has also subsided, growing by only 1 percent in 2022’s last three months, compared with a 5.8-percent peak early in that year. (See “Wage Growth Slows to 1 Percent in 2022’s Final Quarter” in this issue.)
However, “it would be very premature to declare victory [over inflation] or to think that we’ve got this,” Powell cautioned. “We’re going to be cautious about … sending signals that we think the game is won, because we’ve got a long way to go.”
He issued clear guidance: “Given our outlook, I don’t see us cutting rates this year.”
“Our focus is not on short-term moves but on sustained changes to broader financial conditions,” Powell explained. “It’s our judgment that we’re not yet at a sufficiently restrictive policy stance…we expect ongoing hikes.”
“If we do see inflation coming down much more quickly, that will play into our policy decision,” he added.
Moving the rate by only a quarter point is a “clear sign” that the Fed is confident its campaign of rate increases is succeeding against inflation and that the bank is close to halting its increases, according to Charles Ripley, senior investment strategist for Allianz Asset Management, who spoke to the WSJ.
When the bank does pause its campaign of tightening, it probably will “sit tight while economic data catches up to the policy,” Ripley said.
Fed officials had speculated that they might need to loft the rate to between 5 and 5.25 percent this year to lasso inflation. That implies quarter-point increases in March and May, then holding rates steady for some time.
January’s hefty jobs report “leaves the Federal Reserve on course” to make those two increases, the WSJ reported.
Markets have been betting that the Fed’s key rates will stay below 5 percent.
Asked during his press conclave, Powell said it is “certainly possible” that the Fed could keep its rate below 5 percent, but added, “certainty is not appropriate here.”
However, “it will take some time and some patience and we’ll need to keep rates higher for longer” to wrestle inflation down to the Fed’s 2-percent target, he said.
Still, “we’re talking about a couple more rate hikes to get to that level that we think is appropriately restrictive…because inflation is still running very hot,” he stated.