The Federal Reserve (Fed) increased interest rates by half a point, so they remain in the range between 4.25 and 4.5%. It is the highest record in fifteen years, since the stage before the great recession. This shows their commitment to the fight against inflation. His decision shows that the taming of higher prices has not yet ended despite promising green shoots, since in November prices grew by 7.1%, a high record, although below what was predicted.
This increase, the seventh and last of 2022, marks a turning point compared to the last four meetings when as many consecutive increases of 0.75% were set, the most dramatic effort since the beginning of the eighties and the culmination of one of the most aggressive in the history of the US central bank.
This decline in rates marks a new stage in its fight against inflation, but the Fed announced that it will continue raising and keeping the price of money at high levels throughout 2023. There will not be a possible reduction until 2024.
The expected “terminal rate”, or point at which the governors hope to conclude the increase, was established this Wednesday between 5% and 5.25% for next year. This means that they are willing to continue to rise by three-quarters of a point, much more than was expected, since a maximum rise of 0.50% was on the horizon.
This circumstance, more typical of hawks than of doves, did not please Wall Street, which after having a rise of 250 points immediately fell into negative territory with a loss of more than 400 points.
The Federal Reserve also updated its forecasts, in which the Gross Domestic Product (GDP) for 2023 remains at 0.5%, when in September this forecast reached 1.2%, while unemployment will be from 4.6% to 4.4% in the previous report.
However, the least encouraging data refers to inflation. If three months ago it was marked that at the end of this 2022 it would be 5.4%, now it rises to 5.6%, a percentage that seems exaggerated compared to reality. In addition, in 2023, the omen is now 3.1%, compared to the 2.8% predicted in September. That is, it gets worse despite efforts.
In this fight, and although it has reduced the pressure on the price of money, this new move by the Fed will increase the cost of borrowing for many consumers and businesses and exposes the risk of a recession.
Rate increases have led to much more expensive borrowing rates for citizens and businesses, ranging from mortgages to car or business loans. This has also underscored concerns that the Fed is raising rates so much in its campaign to curb inflation that it will trigger a contraction in 2023. Some analysts see what is called a soft landing increasingly unlikely.
These harsh actions are the result of a very tough year, when inflation repeatedly exceeded the Fed’s expectations, climbing to 9.1% in the summer, the highest point in four decades, leaving policymakers struggling to keep up, after dismissing the price increase saying it was temporary. Your own corrective actions demonstrate your valuation error.
But in the face of skyrocketing inflation, which remains very high despite its cooling, well above the 2% that the Federal Reserve believes is healthy, Powell and the central bank governors stressed that rates will remain at their peak for a long time. .
But the top officials at the Fed face a different challenge. For most of 2022 (the rate hike started at 0.25% in March), they have been trying to move fast, and in big swings, drive interest rates into tight territory that would slow the economy and ease a bit. strong labor market considering that it encourages excess consumption.
In 2023, however, another question emerges about how much higher rates need to be and how long the central bank will keep borrowing costs high. Jerome Powell, Chairman of the Fed, indicated in the conference after the conclusion of the meeting that “the economy has slowed down significantly since 2021.”
He qualified, however, that a recession cannot be projected and defended that rate increases to achieve the objective of lowering inflation “is appropriate”, with the hope of seeing more important progress in this fight.
