WASHINGTON- The Federal Reserve said on Wednesday it had turned a key corner in the fight against high inflation, but that “victory” would still require its benchmark overnight interest rate to be increased further and remain elevated at least through 2023.
In announcing its latest policy decision, the US central bank scaled back to a quarter-percentage-point rate increase after a year of larger hikes and swept aside in its statement the long list of reasons, from war to the pandemic, that were driving prices higher to say simply that “inflation has eased.”
Yet policymakers also projected “ongoing increases” in borrowing costs would be needed, a still open-ended commitment that did not yet pinpoint when the rate hikes might stop, and pushed back against an expectation in financial markets that the Fed would pause soon and, indeed, cut rates later this year.
Investors nevertheless took a dovish cue from remarks by Fed Chair Jerome Powell, who referred repeatedly during a news conference to the “disinflationary” process that now appeared to be underway. Equity markets rose as Powell spoke and investors slightly boosted bets for coming rate cuts.
Meanwhile, Powell insisted that rate cuts are not in the offing, and took pains to walk what has become an increasingly fine line between the flow of data showing inflation in steady decline with the need to keep the public and investors attuned to the fact that interest rates will continue rising.
“We can now say for the first time that the disinflationary process has started,” Powell told reporters after the end of the Fed’s latest two-day policy meeting, with goods prices slowing, pandemic-related shortages easing, and supply chains getting back to normal. “This is a good thing.”
From a peak of nearly 7 percent in June, the Fed’s preferred measure of inflation was 5 percent in December, still well above its 2 percent target but heading steadily in the right direction.
Yet “it’s just the early stages,” Powell said. “We’re going to be cautious about declaring victory and … sending signals that we think that the game is won, because we’ve got a long way to go.”
Important segments of the economy, including broad swaths of the service sector, have yet to see inflation slow, the Fed chief said, while a high level of job openings and still-strong wage increases showed the labor market was “extremely tight.”
“The labor market continues to be out of balance,” Powell said, flagging the fact that Fed officials feel it is likely that the unemployment rate will need to rise from its current low level of 3.5 percent for inflation to complete the journey back to the 2 percent level.
The Fed’s statement on Wednesday marked its first explicit acknowledgment of slowing inflation after a year in which prices accelerated much faster than anticipated – requiring a series of rapid three-quarters-of-a-percentage point and half-percentage-point rate increases to match the outbreak of rising prices.
Dynamics that the Fed during the past year has said were driving prices higher, including the pandemic, were either dropped from the statement altogether or, in the case of the war in Ukraine, cited only as a source of “global uncertainty” rather than inflation.
The rate hikes imposed by the Fed since March have now totaled 4.5 percentage points, with the policy rate now in a range between 4.50 percent and 4.75 percent, the highest since 2007. That is reflected in an array of consumer borrowing costs from home mortgages to car loans.
The full impact of that monetary policy tightening has yet to be felt in the economy, but has so far been absorbed without derailing the “modest” economic growth and “robust” job gains that the Fed cited in its latest statement.
