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

By Yasin Ebrahim

-- The ForexFederal Reserve raised interest rates by 0.5% on Wednesday, laying out the carpet for a slower pace of hikes ahead, but signaled that rates will have move higher than previously projected 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 ’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 at least two 25 basis point rate hikes ahead.

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

The central bank also signaled that its likely to keep rates higher for longer through 2023, disappointing market participants calling for a cut in the second half of next year. TheFed forecasts a cut in 2024 to 4.1%, above the 3.9% projected previously.

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 core personal consumption expenditures price index, the Fed’s preferred measure of inflation, is forecast to climb to 3.5% in 2023, up from a prior forecast of 3.1%. For 2024, inflation is estimated to slow to 2.5%, compared with the prior forecast of 2.3%. Fed members kept their inflation forecasts for 2025 unchanged at 2.1%.

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