The Federal Reserve enacted its smallest interest rate hike in nearly a year on Wednesday, bolstering hopes among recession-wary investors that the central bank will consider pausing its policy tightening effort in the near future.
The rate-making Federal Open Market Committee hiked its benchmark rate by a quarter percentage point – to a range of 4.5% to 4.75% – at the conclusion of its two-day policy meeting.
The increase marked the eighth consecutive hike dating to March of last year.
However, the quarter-point hike was the smallest since the Fed began its current policy tightening effort and followed a series of supercharged hikes — including one in December.
The Fed’s decision was in line with the market’s expectations. Just hours before the Fed’s announcement, investors were pricing in a 99.3% probability that officials would hike the benchmark rate by a quarter point and a 0.7% chance that officials would leave the rate unchanged, according to CME Group data.
Fed Chair Jerome Powell and his colleagues are in the midst of a high-wire attempt to bring inflation back to normal levels, despite mounting concerns among investors that their efforts to prompt a severe recession.
Investors anxiety about the Fed’s path was apparent in US stocks ahead of the announcement. All three major indices were trading in negative territory, with the Dow Jones Industrial Average slumping more than 300 points.
Projections released in December signaled the Fed would hike rates above 5% this year – well into restrictive territory – and keep them level for the foreseeable future to ensure that inflation was fully tamed. The Fed is scheduled to meet again next month.
Powell has cited concerns based on past instances in which the Fed eased policy too soon and caused more economic trouble.
In recent remarks, top Fed officials have noted progress on the inflation front even as they reiterated that more concrete evidence was needed.
“Even with the recent moderation, inflation remains high, and policy will need to be sufficiently restrictive for some time to make sure inflation returns to 2% on a sustained basis,” Fed vice chair Lael Brainard said earlier this month.
Policymakers received a positive sign last week after the Fed’s preferred inflation gauge, the PCE Index, cooled to 5.5% in December. Prices have fallen steadily in recent months, but are still running well above the Fed’s 2% target and causing budget problems for US households.
“Inflation pressures are easing and investors are expecting the Fed will soon move to the sidelines rather than push interest rates above 5% in the months ahead,” said Bankrate chief financial analyst Greg McBride.
At the same time, federal data showed personal spending adjusted for inflation fell by 0.3% in December — a sign that consumers are cutting back on purchases in a potentially worrying sign for the economy.
Bill Adams, chief economist for Comerica Bank, said the Fed will “probably make one more quarter percentage point rate hike” in March – though the final decision will depend on incoming economic data.
“If the labor market data deteriorate significantly over the next few weeks, the Fed could take a pass on that March rate hike; on the other hand, jobs data could prove more resilient than expected and the Fed could make a third quarter percentage point rate hike in May before moving to the sidelines,” Adams said.
