US Fed unveils quarter point rate hike as inflation cools

Published February 1st, 2023 - 08:55 GMT
US Fed rate hike
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ALBAWABA — The United States Federal Reserve slowed its pace of interest rate hikes on Wednesday, softening its aggressive campaign to constrain costs as inflation dampens.


The US central bank announced a quarter-point hike to the benchmark lending rate at the end of its two-day policy meeting, taking the rate to a target range of 4.50-4.75 percent, the highest level since September 2007.


"Inflation has eased somewhat but remains elevated," said the Fed's policy-setting Federal Open Market Committee in a statement, adding that recent indicators "point to modest growth in spending and production" as economic activity eases, while signaling the battle to tame inflation was not yet over.


In the statement, the committee anticipates ongoing increases to be in the target range, anticipating that would be adequate enough to bring inflation down to policymakers' 2 percent target over time.


Since March 2022, the Fed has raised interest rates eight times, including four consecutive 0.75 percentage point increases, lifting borrowing costs hoping to dampen demand.


The aim is to reel in inflation, which surged to its fastest pace in decades last year but has since come off a peak.


The 0.25 percentage point rise marks a step down from December's 0.5-point hike and a series of bigger hikes last year.


The Fed will want "concrete evidence that they've killed inflation, and they haven't yet," Ryan Sweet, chief US economist at Oxford Economics, told AFP.


While an easing of supply chain stress and shift in consumer spending from goods to services allows some costs to moderate, Sweet expects that services costs will oblige the Fed to stay on course and raise rates further.


"If they signal that they're done and then have to reverse course, that's going to be very disruptive to financial markets," Sweet added.


Talking to CNBC after the announcement, Jerome Powell, chair of the U.S. Federal Reserve, said he doesn’t expect the Fed to cut rates this year, as some major strategists project.


"Given our outlook, I don’t see us cutting rates this year, “If we do see inflation coming down much more quickly, that will play into our policy setting, of course," Powell added.


"Every further Fed rate hike from here just increases the chance of an entirely unnecessary recession," tweeted Ian Shepherdson, chief economist of Pantheon Macroeconomics, on Tuesday before the rate hike announcement, arguing that it was time to pause the Fed's rate hikes, telling the Fed that "their work is done".


"They have suppressed inflation expectations; the Covid distortions to rents and margins are working through and will drive inflation down," Shepherdson added.


David Kelly, chief global strategist at JPMorgan Asset Management, has long said that the Fed traditionally starts reacting to economic conditions too late, raises rates too high and keeps rates high too long.


"They say that they acknowledge the long lags by which monetary policy affects the economy, but with inflation coming down and with consumption spending falling, with industrial production falling, they are still raising rates. That is obviously waiting too long," Kelly told CNBC.


The Bank of England and European Central Bank are expected to announce their own rate increases on Thursday.



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