The Fed raised its benchmark interest rate by half a point to a range of 4.25% to 4.5%, its highest level in 15 years. Although lower than previous three-quarter increases, the latest move will further raise the cost of many consumer and business loans and the risk of a recession. Policymakers also expect their key short-term rate to reach a range of five percent to 5.25 percent by the end of 2023. That suggests the Fed is poised to raise its benchmark rate by an additional three quarters unit and leave it there until the end of next year. Some economists had expected the Fed to forecast only an additional half-point increase. The latest rate hike was announced a day after an encouraging report showed that inflation in the United States slowed in November for a fifth straight month. The 7.1 percent annual increase, while still high, was well below the recent peak of 9.1 percent in June. “Inflation data in October and November show a welcome decline,” Chairman Jerome Powell told a news conference. “But significantly more data will be needed to give confidence that inflation is on a steady downward path.”
The US economy is expected to grow little next year
In its updated forecasts, Fed policymakers forecast slower growth and higher unemployment next year and into 2024. The jobless rate is projected to jump to 4.6 percent by the end of 2023, from 3.7 percent today . This would mean a significant increase in unemployment which would normally reflect a recession. In line with a sharp slowdown, officials also predicted the economy would barely grow next year, growing just 0.5 percent, less than half the forecast they had made in September. In recent weeks, Fed officials have said they are seeing some evidence of progress in their effort to beat the worst period of inflation in four decades and bring inflation back to their two percent annual target. The national average for a gallon (about 3.8 liters) of regular gas, for example, has fallen from US$5 in June to US$3.21. Many supply chains are no longer blocked, thus helping to lower commodity prices. Better-than-expected November inflation data showed prices of used cars, furniture and toys fell last month. So are the costs of services from hotels to plane tickets and car rentals. Rents and house prices are also falling, although these declines have yet to feed into government data. And a measure the Fed watches closely – “core” prices, which exclude volatile food and energy costs for a clearer picture of underlying inflation – rose slightly for only the second month in a row. Inflation has also eased slightly in Europe and the United Kingdom, leading analysts to expect the European Central Bank and the Bank of England to slow the pace of rate hikes at their meetings on Thursday. Both are expected to raise rates by half a point to target still-painfully high price rises after three quarters of big hikes. Inflation in the 19 countries that use the euro eased to 10 percent from 10.6 percent in October, the first drop since June 2021. The rate is well above the bank’s two percent target that rate hikes are expected to continue next year. Inflation in Britain also fell from a 41-year record high of 11.1% in October to a further high of 10.7% in November. At the Fed, Powell made it clear that the central bank is not close to declaring victory over high inflation. Fed officials will likely want to see further modest inflation readings before they feel comfortable holding off on rate hikes. WATCHES | How to weather the storm of rate hikes:
Rising interest rates: how to weather the storm
Personal finance educator Kelley Keehn offers advice on how Canadians can prepare for the coming economic changes as Canada’s central bank raises interest rates. One reason for caution is that inflation counters can sometimes reignite after the initial slowdown. In 2021, for example, core price increases slowed for a few months in the summer before accelerating again to new highs. Cumulatively, the Fed’s hikes have led to much more expensive borrowing rates for both consumers and companies, ranging from mortgages to auto and business loans. The hikes have caused home sales to fall and are starting to drive down rents on new apartments, a major source of high inflation. Officials have said they want interest rates to reach “restrictive” levels that slow growth and hiring and reduce inflation to their annual target of 2 percent. Concerns have grown that the Fed is raising interest rates so much in its bid to curb inflation that it will trigger a recession next year.
