The central bank’s latest move put its benchmark short-term rate in a range of 4.5% to 4.75%, its highest level in about 15 years.
The slowdown in inflation suggests that its rate hikes have started to achieve their goal. But measures of inflation are still far above the central bank’s 2% target. The risk is that with some sectors of the economy weakening, ever-higher borrowing costs could tip the economy into a recession later this year.
The Fed’s latest policy statement indicated that the central bank no longer regards COVID-19 as a driver of higher prices. It removed from its statement a reference to the pandemic as a cause of supply shocks that have heightened inflation. It also dropped a reference to “public health” as among the factors it will consider when assessing its next steps.
But recent gauges show that wage growth is slowing. And in December, overall inflation eased to 6.5% in December from a year earlier, down from a four-decade peak of 9.1% in June. The decline has been driven in part by cheaper gas, which has tumbled to $3.50 a gallon, on average, nationwide, from $5 in June.
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