The Federal Reserve System announced a policy move at the last Wednesday session of the year, lifting the target range for the federal funds rate by 0.50 percentage point. The new range sits at 4.25 to 4.50 percent. The central bank described the increase as appropriate to attain a rate path that will restrain inflation while supporting sustainable growth over time.
The 0.50 point rise marks the largest single increase in a calendar year since 1980. While the pace is lower than the 0.75 point moves seen in the prior four meetings, the Fed has raised rates in seven of its eight meetings in 2022. Monetary policy remains tight as the Fed prioritizes returning inflation to its 2 percent objective in the medium term.
The current level of policy interest is the highest since December 2007, just before the global financial crisis. The Fed notes that recent indicators point to cooler growth in spending and output. At the same time, job creation has remained solid and the unemployment rate has stayed low, even as inflation remains elevated due to supply and demand imbalances stemming from the pandemic, higher food and energy costs, and broader price pressures.
The Fed also highlighted the impact of the war in Ukraine, describing it as producing substantial human and economic hardship and adding upward pressure on inflation that affects global activity. The central bank signaled a readiness to implement further tightening if incoming data show risks to its goals. It will adjust the pace of rate hikes as needed to ensure price stability and maximum employment over time.
The statement emphasizes that the path ahead will reflect a careful assessment of cumulative tightening, the lag between policy actions and their effects on activity and inflation, and evolving economic and financial conditions. Jerome Powell, chair of the Federal Reserve, reaffirmed the commitment to bring inflation back to the 2 percent target and to sustain a credible stance until inflation is decisively on a downtrend.
predictions
Fed officials also released an updated set of macroeconomic projections alongside the rate decision. In September most members anticipated rates between 4.50 and 5.0 percent by year end 2023, but the median now points to a higher end of the range. The majority foresee a year-end rate above 5 percent, with substantial debate about whether 2024 will see a rate near 5 percent or closer to 4 percent.
Regarding the broader economy, the central bank has revised its growth outlook downward for 2023. The projection for gross domestic product has been nudged lower, while unemployment is expected to average around the mid-3s to mid-4s percent range in the near term. The Fed projects 2024 to show ongoing but slower growth and a gradual improvement in the labor market.
Inflation data showed a cooling trend, with the latest readings around the mid to high single digits. While the pace of price increases has moderated from earlier peaks, inflation remains well above the 2 percent target, reinforcing the case for ongoing rate rises in the near term. Some analysts note that the tightening cycle could begin to ease as inflation moves closer to target, though risks to growth remain on the radar.
Industry experts suggest the policy stance could extend beyond the current cycle, with expectations of continued rate increases into 2024. The Fed has already approved several successive adjustments since mid-year, keeping the target range elevated to curb demand and align monetary policy with the inflation objective.