The Fed raised interest rates by 0.25 percentage points on Wednesday to bring the federal funds rate to a range of 4.5 to 4.75 percent, marking its eighth straight rate hike since last March as the central bank continues its fight against inflation.
The latest hike is the smallest since the Fed started raising interest rates last year at the fastest pace in decades, culminating in four 75-basis points hikes in a row. Now with prices coming down and the economy growing at a slower pace, the Fed is slowing down the tempo of its rate increases.
Here are five things to know about where the Fed plans to go from here.
The Fed sees a subdued growth in 2023 “but not a recession”
Fed Chair Jerome Powell said most FOMC members are not anticipating a recession this year.
“Different participants have different forecasts, but generally those forecasts are for continued subdued growth, some softening in the labor market but not a recession – not a recession,” Powell emphasized during a press conference following the meeting Wednesday.
“Growth will continue at a fairly subdued level this year, but there are other factors that need to be considered,” Powell said.
He mentioned positive international economic conditions, improving consumer sentiment as a result of disinflation, and state and local governments being “flush with cash.”
“Many of them are considering tax cuts or even sending checks,” he said. “I think there’s a good chance those factors will help support positive growth this year.”
Other changes in language from the FOMC’s December statement indicate that the committee is less concerned about public health metrics and that the effects of the pandemic as well as the war in Ukraine on the economy are diminishing.
Economists say that a soft landing would show up in the data as a few quarters in a row of flat growth.
“There is a strong chance the [Federal Open Market Committee] could engineer a soft landing for the economy, which would involve a couple of quarters of flat growth,” Boston College economist Brian Bethune wrote in an analysis.
After contracting in the first two quarters of 2022, U.S. gross domestic product (GDP) increased at an annualized rate of 3.2 percent in the third quarter and 2.9 percent in the fourth quarter to finish off the year at a 2.1-percent annual growth.
The Fed can’t protect the economy from a debt default
Powell said Wednesday that the Fed cannot protect the economy if an impasse between lawmakers and the White House on Capitol Hill results in a default on U.S. debt, which could occur as soon as in June if the debt ceiling isn’t raised.
“No one should assume that the Fed can protect the economy from the consequences of failing to act in a timely manner,” he said.
A variety of novel measures to avoid a debt default in the absence of a deal in Congress, such as minting a trillion dollar coin, have garnered public attention in recent weeks, but Powell didn’t engage with them on Wednesday.
“In terms of our relationship with the Treasury [Department], we are their fiscal agent, and I’m just going to leave it at that,” he said. “It’s really Congress’ job to raise the debt ceiling.”
One possible short-term resolution to the debt ceiling issue floated by Republicans is the notion of prioritizing certain debt payments and expenditures over others spending items over others. National security spending would be one such prioritized item for Republicans while other social spending favored by Democrats could be suspended.
But Powell didn’t bite on this, either.
“There’s only one way forward here and that is for Congress to raise the debt ceiling so that the United States government can pay all its obligations.”
The Fed said inflation isn’t coming down everywhere
Powell said Wednesday the Fed is observing disinflation in parts of that economy.
“We actually see disinflation in the goods sector,” Powell said. “We note that when we say inflation is coming down that this is good.”
However, Fed officials aren’t seeing these downward trends everywhere. Powell noted prices are still rising for many and disinflation has yet to occur in the basic core services outside of theminus housing sector, but that he hoped to see it start there soon.
In general, FOMC members said in their statement that inflation has “eased somewhat but remains elevated.”
The consumer price index (CPI) has dropped every month since June and stands now at a 6.5-percent annual increase, down from 7.1 percent in November.
The personal consumption expenditures price index (PCE) has also fallen to 5 percent annually from 6.8 percent over the same period.
The Fed anticipates more rate hikes but not bigger ones
After the meeting of its rate-setting committee on Wednesday, the Fed said in a statement it anticipates “ongoing” rate hikes and is debating “the extent” of future increases. That’s a change in language from its last meeting in December, at which committee members said they were debating “the pace” of future rate hikes.
This suggests another 25 basis-point rate hike at its next meeting in March and leaves open the possibility of an additional 25-point hike at the following meeting in May.
“The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time,” members of the Federal Open Markets Committee (FOMC) said in their statement.
Fed officials in December projected boosting their baseline interest rate range to a midpoint of 5.1 percent in 2023, above the range of 4.5 to 4.75 percent set by Wednesday’s rate hike.
The Fed didn’t release an updated SEP at Wednesday’s meeting, but some economists worry that the smaller rate hike means the Fed will have trouble meeting its current projections.
“It may make it difficult for them to hit their 5-5.25 percent hike with two additional 25 bps hikes if inflation continues to trend down,” Joe Davis, an analyst with investment company Vanguard Group, wrote in a statement.
Powell said Wednesday during a press conference that the Fed’s terminal rate “could certainly be higher than we’re writing down right now.”
The Fed still sees the job market holding strong
Wednesday’s Job Openings and Labor Turnover Survey (JOLTS) from the Labor Department showed continued strength in the labor market, with job openings increasing monthly by 5.5 percent to 11 million.
There are now about two job openings for every one unemployed person in the U.S. labor force, according to the Labor Department, a ratio that favors job seekers and workers over managers.
“Labor demand substantially exceeds the supply of available workers,” Powell said, arguing that the Fed’s rate hikes have brought down inflation without seriously weakening the job market
Fed officials in December projected the jobless rate to reach 4.6 percent in 2023, more than a full percentage point higher than its current level of 3.5 percent, which is the lowest since 1969. That number will likely be updated in March when the Fed next puts out its next summary of economic projections.