By: Seth Ellison
Key Takeaways:
- Fed raises interest rates again, but smallest hike in recent months.
- Chair Powell says “more work to do” to drive down inflation to 2%.
- Slower growth predicted in 2023, along with rising unemployment.
Inflation in the U.S. slowed in November for the fifth straight month, yet the Federal Reserve stayed on course yesterday and raised the target federal funds rate – what banks charge each other for overnight loans – to a range of 4.25%–4.50%, the highest level since 2007. Still, the rate hike was the smallest of the last four increases, a sign that inflation may be easing. “Over the course of the year, we’ve taken forceful actions to tighten the stance of monetary policy, we’ve covered a lot of ground, and the full effects of our rapid tightening are yet to be felt. Even so, we have more work to do,” said Jerome Powell, Chair of the Federal Reserve, during yesterday’s meeting in Washington, D.C.
This is the seventh time in 2022 that the Fed has raised rates, and hinted at more to come. Powell indicated that he will continue the battle to curb the worst inflationary period in decades, with the goal of driving inflation down to 2% from its current level of 7.1%.
A “Soft Landing” and Its Repercussions
“Reducing inflation is likely to require a sustained period of below trend growth and some softening of labor market conditions,” said Powell.
Policymakers are already predicting economic growth to only expand 0.2 percent this year, lower than the original forecast of 1.7 percent. They also forecast sluggish growth below 2% from 2023 through 2025. Despite a 50-year low for unemployment, robust job gains, and rising wages, the 2023 job market will likely experience slightly higher unemployment of 4.4% compared with 3.7% at the end of 2022.
“The labor market continues to be out of balance,” said Powell, “with demand substantially exceeding the supply of available workers, which we predict will come into better balance over time, easing upward pressures on wages and prices.”
This economic woe is a part of the Fed’s strategy to facilitate a so-called “soft landing” to slow growth and curb inflation without causing a recession. Some economists say there’s a chance of a recession in 2023, but there’s no firm consensus among experts on this happening.