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The Federal Reserve increases interest rates by a quarter point and foreshadows future rate increases.

The Federal Reserve increases interest rates by a quarter point and foreshadows future rate increases.

On February 1, 2023, in Washington, the chairman of the Federal Reserve Board, Jerome Powell, addresses during a news conference following a meeting of the Federal Open Market Committee. (Kevin Dietsch/Getty Pictures) )

In line with market forecasts, the Federal Reserve increased interest rates by 25 basis points, bringing the benchmark federal funds rate to its desired range of 4.50 to 4.75 percent.

Since the beginning of the current cycle of quantitative tightening in March 2022, this rate increase was the smallest.

According to a statement from the Federal Open Market Committee, central bank officials believe that additional rises will be required to achieve "a posture of monetary policy that is adequately restrictive" (FOMC). Despite a slowdown, inflation is still too high for the American economy.

"Recent signs suggest that spending and production are growing moderately. Recent months have seen a strong increase in job creation, and the unemployment rate has stayed low. Although it has considerably decreased, inflation is still high, according to the FOMC.

"The war waged by Russia against Ukraine is leading to severe economic and human suffering as well as increased levels of uncertainty around the world. The Committee pays close attention to the risks of inflation.

However, policymakers will take into account policy lags, financial and economic developments, and cumulative tightening when deciding the amount and speed of future rate hikes.

The rate-setting committee will keep reducing the amount of agency debt, Treasury securities, and agency mortgage-backed securities it holds.

The statement reads, "The Committee is resolutely committed to bringing inflation back to its 2 percent objective."

A quarter-point rate increase by the FOMC was generally expected by the market in light of the U.S. economy's slowdown and declining inflation.

Markets on February 1 ended higher following a tumultuous session. The United States Dollar Index, which compares the dollar to a basket of currencies, fell by 0.25 percent to below 102. The benchmark 10-year yield fell by roughly 5 basis points to about 3.42 percent on a mixed day for the US Treasury market.

Popular economist Mohamed El-Erian tweeted, "Those hoping for a change to the 'ongoing rises' term are disappointed as the Fed is not ready yet to signal an immediate stop to the hiking cycle."

What Will the Federal Reserve Do Next?

U.S. rate futures are now factoring in an 85% chance of a quarter-point raise at the policy meeting next month as a result of the FOMC statement. A rate pause has a 15% probability of occurring as well..

"Federal Reserve officials are debating how much higher the federal funds rate should go, particularly as the institution approaches the end of its quantitative-tightening cycle, even though economists and market analysts have suggested that it might be time to hit the pause button to assess how 15-year high interest rates are affecting the overall economy.

Investors have been at odds with the Fed since November 2022, arguing that the central bank would change course and start lowering rates later this year in reaction to weakening economic conditions. The Summary of Economic Projections (SEP), according to Fed Chair Jerome Powell, is a stronger predictor of where the benchmark rate may move in 2023.

Policymakers anticipated the median rate to be 5.1 percent this year, per the SEP.year.

Many FOMC members who vote on interest rates have argued that it is too soon to declare the end of inflation.

Loretta Mester, head of the Federal Reserve Bank of Cleveland, argued that the institution must continue and raise the primary policy rate to at least 5% during a recent interview with The Associated Press.

The Federal Reserve Bank of Kansas City's retiring president, Esther George, told Reuters that although she would be content with lesser increases, interest rates need to rise further.

The Federal Reserve increases

"Inflation forecasts among the public are starting to decline. So I feel confident starting the stepped-down approach. If I were there, I'd be glad to earn 25s (basis points)," she remarked. "The risk of inflation rising is still present. I don't believe I've come to the realisation that it is obviously dropping. There are enough problems in the world that we must take precautions.

Fed Vice Chair Lael Brainard stated in a speech at the University of Chicago Booth School of Business last month that policymakers need to keep rates high for a protracted length of time, regardless of the central bank's decision.

According to Brainard, "inflation remains high despite the recent decrease, and policy will need to be sufficiently tight for some time to ensure inflation returns to 2 percent on a consistent basis." "The FOMC downshifted the pace of increases in the target range at its most recent meeting after quickly moving policy into restrictive territory. As we raise the policy rate to a level that is adequately restrictive while taking into account the risks associated with our dual-mandate goals, we will be able to evaluate additional data.

 Examining the Data

 The core Consumer Price Index (CPI), which excludes the volatile energy and food sectors, fell to 5.7 percent in December 2022, and the annual inflation rate decreased to 6.5 percent.

The chosen inflation indicator of the Fed, the Personal Consumption Expenditures (PCE) price index, likewise experienced a slowdown in December 2022, falling to 5% year-over-year. The decline in the core PCE price index was 4.4 percent.
Numerous economic indicators haven't been encouraging. In December 2022, personal consumption fell by 0.2 percent while personal income grew by 0.3 percent. The manufacturing indices from the Richmond, Dallas, and Kansas City Federal Reserve banks all remained in negative territory. In December 2022, the Conference Board Leading Economic Index (LEI), a leading recession predictor, declined at a faster-than-anticipated rate of 1%.

The Atlanta Fed Bank's GDPNow model estimate predicts 0.7 percent growth in the next January to March period in its initial forecast for the first quarter of 2023.


The Federal Reserve increases interest rates by a quarter point and foreshadows future rate increases.