Fed raises rates by half a percentage point in last 2022 hike

WASHINGTON – The Federal Reserve raised interest rates by half a percentage point Wednesday and signaled plans to keep raising them more in 2023, capping off one of the most aggressive years in the central bank’s history and marking a new phase in its fight against inflation.

The Fed is on track to hike rates past 5% next year, according to projections released at the end of the central bank’s two-day policy meeting.

Those estimates show officials expect to add another three-quarters of a percentage point onto their base policy rate, though it was unclear whether that would take place over three more meetings (with hikes of 0.25 percentage points each) or two (with hikes of 0.50 and 0.25 percentage points).

Rate cuts could come in 2024.

Officials clearly expect the economy to slow as they hold rates high.

Growth is expected to eke out at 0.5% next year, and the labor market will soften, with the unemployment rate reaching 4.6% at the end of 2023.

Inflation is expected to end 2022 at 5.6%, using the Fed’s preferred gauge, before falling to 3.1% next year.

“Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures,” according to a Fed statement.

“Russia’s war against Ukraine is causing tremendous human and economic hardship. The war and related events are contributing to upward pressure on inflation and are weighing on global economic activity.”

The Fed has now hoisted rates seven times this year and signaled a few more hikes early next year.

To control the highest inflation in decades, central bankers have been on a tear, raising their base policy rate from zero to more than 4%.

The dramatic actions are the result of a dramatic year when inflation repeatedly bucked the Fed’s expectations, climbing this summer to 9.1%, leaving officials scrambling to keep up.

Now, the Fed’s top policymakers face a different challenge. For most of 2022, they were trying to move quickly, and in big swings, to get interest rates into “restrictive territory” that will slow the economy.

But 2023 will raise other questions about how much higher rates go and how long the central bank will hold borrowing costs high.

Wednesday’s move brings the federal funds rate to between 4.25 and 4.5%.

Rate hikes operate with a lag, and the full force of the Fed’s decisions won’t seize the economy – or cause a recession – for months to come. What that looks like, and how severe the pain is, remains to be seen.

“Do they go to 5%? Maybe, but they’re pretty much at the end,” said Peter Boockvar, chief investment officer of Bleakley Financial Group. “But just because they’re close to being done with raising rates doesn’t mean they’re anywhere close to transitioning off that terminal level.”

For months, financial markets have flown high and sunk low on Fed policy.

In November, when Powell signaled that the bank would start to ease up on rate hikes at this meeting, stock markets rejoiced, and they rose on Tuesday after the release of an encouraging inflation report.

But Wall Street is still jittery, since the Fed has made clear that taming the worst inflation in decades will involve pain for businesses and households alike.

The Fed’s actions in 2022 packed a punch.

The central bank hiked rates in March for the first time since the pandemic began, moving by a modest quarter of a percentage point.

When officials met again in May, they opted for a stronger increase of half a percentage point.

Then they went further, hiking rates four consecutive times between June and November by a whopping three-quarters of a percentage point each, moving so forcefully that Fed watchers began criticizing the moves as overkill.

Powell maintains that the economy can still avoid a recession, especially under a scenario where the labor market comes back into sync and employers nix millions of vacant positions, rather than laying off already employed people.

So far, the labor market is still growing, and layoffs have been limited to smaller pockets of the economy.

Crucially, consumer spending is keeping up despite high inflation and uncertainty about the future.

But not even the experts can guarantee what’s to come. Powell and his colleagues concede that inflation, broken supply chains and the economy’s reemergence from the pandemic have repeatedly bested Fed models.

And all year, Fed officials scratched out their forecasts to downgrade expectations for the labor market, economic growth and inflation. Only time will tell if they get 2023 right.

“We’ll continue to make forecasts, but we’re going to have to be humble and skeptical about forecasts, I think, for some time,” Powell said last month at the Brookings Institution. “And that calls for a lot of risk management.”

Plus, the coming year could bring some unforeseen shock, much like Russia’s invasion of Ukraine did in February.

The global economy could also descend into a recession while international central banks all hike rates at the same time.

Boockvar noted that this week alone, rate increases are slated to be announced by the European Central Bank, the Bank of England, the Norges Bank, the Saudi National Bank, and central banks in Taiwan, the Philippines, Mexico and Colombia.