Fed Says More Hikes to Follow After 0.5% Rate Increase

Brian Turner
14 Dec, 2022
New York City

The Federal Reserve lifted its key lending rate and held out for more rate hikes and reiterated its commitment to bring down sky-high inflation. 

The policy committee members in a unanimous decision agreed to slow the rate increase to 50 basis points and lift the federal funds range to between 4.25% and 4.50%. 

"The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time," the accompanying statement noted. 

The central bank moderated its rate hike to 50 basis points after lifting rates by 75 basis points for four times in a row. 

The rates are now at the level last seen in 2007. 

Despite some promising signs on the inflation front, inflation is still high  and inflation has seeped deeper in the service sector of the economy and harder to dislodge. 

Moreover, the labor market has remained strong and the economy continues to add jobs at a monthly pace of 392,000 till November, slower than 562,000 pace in all of 2021. 

The Federal Reserve is also on track to lower its holding of government and agency securities by as much as $95 billion as the central bank continues with its plan in shrinking its balance sheet. 

So far in the year since June, the central bank has let $332 billion of the government securities run off and shrink its balance sheet to $8.62 billion. 

 

Projections 

The Federal Reserve also lifted its 2022 GDP growth outlook to 0.5% from September's estimate of 0.2%. 

But also lowered its estimate of 2023 economic growth to 0.5% from 1.2%. 

More worrisome to the market was the central bank's upward revisions on inflation. 

The Federal Reserve now estimates 2022 PCE inflation at 5.6% from its previous estimate of 5.4% in September and 2023 estimate to 3.1% from 2.8%. 

2022 Core PCE inflation estimate was revised higher to 4.8% from 4.5% and 2023 to 3.5% from 3.1%. 

The revised projections indicate the inflation is likely to stay above the Fed's target rate of 2.0% well beyond 2023, suggesting more rates are likely to follow and rates are likely to stay elevated for a prolonged period of time. 

The median estimate of the fed funds in 2023 is 5.1% and 70% of confidence interval indicates rates may range between 6.0% and 3.75% in 2023.