In a new increase in interest rates, this time by 50 basis points, the US Federal Reserve proceeded in an attempt to contain inflation that “runs” at a multiple rate of the 2% target. The Fed’s key dollar lending rate is now in the range of 4.25% to 4.50%, the highest since 2007.
Federal Reserve Chairman Jerome Powell and other members have also signaled they will continue with hikes in 2023, albeit at a more subdued pace, to counter the price rally. The rate-setting committee expects that “continued increases” will be needed to achieve a monetary policy “that will be sufficiently restrictive to return inflation to 2% over time,” the statement said.
Fed officials now forecast that interest rates are expected to need to rise to 5.1% to 5.1% – up from 4.5% today after the new hike – before putting the brakes on tighter monetary policy. For this reason, the FED predicts that it will continue the increases in 2023 and estimates that no reductions in borrowing costs are expected before 2024.
The new hike was smaller than the previous four meetings, when the Fed had raised interest rates by 75 basis points at each of them. Better-than-expected inflation data and the fear that large sustained increases could cause a significant blow to the US economy contribute to the FED’s brake on the intensity of increases.
By steadily raising the cost of borrowing, the Federal Reserve expects to reduce demand for expensive items such as homes and cars, helping to slow the economy and easing upward pressure on prices.
Fed officials had raised the key interest rate by 0.75 percentage points on November 2, from near zero in early March. The bank had raised interest rates by 75 basis points since 1994. It had made four consecutive increases of that size from June through October.
A few days ago, Jerome Powell had signaled that the central bank would begin to move less aggressively to see how the price movements in the economy would develop.
The inflation factor
US inflation stood at 7.1% in November on a year-on-year basis, down from October’s annual price rally of 7.7%, according to the latest data from the US Labor Department. That was the slowest rate of growth in nearly a year and lower than analysts had expected.
The annual price index had peaked at 9.1% in June, the biggest increase since November 1981. Inflation, however, remains well above the Fed’s 2% target.
The consumer price index rose 0.1% last month compared to October, after rising 0.4% in October compared to September. U.S. gasoline prices fell 2.0%.
The cost of natural gas also fell, as did electricity prices. Food prices rose 0.5%, the slowest rate since December 2021, after rising 0.6% in October.
The cost of food consumed at home increased by 0.5%, driven by higher prices of fruit and vegetables, cereals and soft drinks. But meat, fish and eggs cost less in the US now.
“Prices are still very high,” US President Joe Biden said in a statement, adding that “things are improving, going in the right direction.”
The rise in consumer prices is now slowing in the US as the cost of energy, used cars, medical care and airline tickets fall.
