Fed slows rate hike to 0.5%, but signals higher peak rate ahead By Investing.com

By Yasin Ebrahim

Investing.com — The Federal Reserve raised interest rates by 0.5% on Wednesday, laying out the carpet for a slower pace of hikes ahead, but signaled it would be no rush to pivot to cuts as inflation remains well above target. 

The Federal Open Market Committee, the FOMC, raised its to a range of 4.25% to 4.5% from 3.75% to 4% previously. 

The move marked a slowdown from the 0.75% rate increases seen at the prior four meetings. This steep pace of rate hikes, the fastest since the 1980s, has begun to make a dent in inflation. 

“The Fed is taking the pedal off the accelerator to some extent because its medicine [tighter monetary policy] is working,” Eric Diton, president and managing director at The Wealth Alliance told Investing.com’s Yasin Ebrahim in a recent interview. “A lot of areas of high inflation are cooling off including the owner equivalent index [what it would cost to rent your own house], one of the biggest components of CPI,” Diton added.

While the recent evidence pointing to slowing inflation has been encouraging, the Fed believes further hikes, though at a slower pace, are needed to ensure that price pressures eventually drop to its 2% target.

The Fed now sees its benchmark rate rising to a peak, or terminal rate, of 5.1% in 2023, above the 4.6% forecast in September, suggesting another two 0.25% rate hikes in 2023.

That is higher than market expectations for rates to peak at the high end of around 5%.

Last month, Fed Chairman Jerome Powell flagged the strong price pressures in the services sector, ex-housing, of the economy, underpinned by wage growth, as a key driver of inflation and reiterated that there is still more work to do. 

“Because wages make up the largest cost in delivering these services, the labor market holds the key to understanding inflation in this category,” Powell said in a November speech at the Brookings Institution event in Washington.

The slower pace of rate hikes, however, hasn’t dampened calls on the Fed to pause its policy tightening sooner rather than later, as its rate hikes delivered so far require time to make a full impact on the economy.  

“Signs that inflation is easing allows the Fed to take a breath, and let their incredibly powerful policy proliferate through the economy,” Diton said ahead of the decision. “I think they’ve done enough … they don’t need to do anything other than just wait.”