The Federal Reserve raised its key interest rate by a quarter-point today. Though smaller than its previous hike, the latest move will likely further raise the costs of many consumer and business loans and the risk of a recession.
FILE - Federal Reserve Chair Jerome Powell speaks during a news conference Wednesday, Dec. 14, 2022, at the Federal Reserve Board Building, in Washington, as an aides hand reflects under the podium. On Wednesday, the Federal Reserve closes its two-day meeting where economists expect the central bank to raise its benchmark rate by a quarter of a point as its battle against four-decade high inflation extends into 2023.
In a statement, Fed officials repeated language they have used since March that says, “ongoing increases in the target range will be appropriate.” That is seen as a signal that they intend to raise their benchmark rate again when they next meet in March and perhaps in May as well. Yet Wall Street investors have priced in only one more hike. Collectively, in fact, they expect the Fed to reverse course and actually cut rates by the end of this year. That optimism has helped drive stock prices up and bond yields down, easing credit and pushing in the opposite direction that the Fed would prefer.
Over the past several months, the Fed’s officials have reduced the size of their rate increases, from four unusually large three-quarter-point hikes in a row last year to a half-point increase in December to Wednesday’s quarter-point hike. Over the past year, with businesses sharply raising pay to try to attract and keep enough workers, Powell has expressed concern that wage growth in the labor-intensive service sector would keep inflation too high. Businesses typically pass their increased labor costs on to their customers by charging higher prices, thereby perpetuating inflation pressures.
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