On Wednesday, the US Federal Reserve tamped down its aggressive drive to curb inflation, raising the benchmark lending rate by half a percentage points but cautioned that there is still “a length to go.”
With interest-sensitive industries like housing already suffering from tighter policy, the American central bank aggressively increased rates seven times this year in an effort to reduce demand in the largest economy in the word. With the most recent increase it now stands at the highest rate of 4.50pc from 4.25pc in 2007.
Jerome Powell signaled that their battle to cool the US economy is not yet over. In a statement, the Fed’s policy setting Federal Open Market Committee said it “anticipates that ongoing increases in the target range will be appropriate” to reach a stance restrictive enough to rein in inflation.
A quarterly forecast released with Wednesday’s decision also saw policymakers downgrade US economic growth to 0.5pc in 2023, just narrowly avoiding a contraction. They also raised their unemployment and inflation estimates for next year.
“Fifty basis points is still a historically large increase, and we still have some ways to go,” Fed Chair Jerome Powell told reporters in a press briefing after the rate announcement, and markets slumped on the central bank’s signals.
In their projections, policymakers expect rates would land higher than expected at 5.1pc next year, according to a median forecast.
“I wouldn’t see us considering rate cuts until the committee is confident that inflation is moving down to two per cent in a sustained way,” Powell said.
While consumer inflation eased in October and November, Powell said “it will take substantially more evidence to give confidence that inflation is on a sustained downward path.”
He added that households have been squeezed by red-hot prices, with conditions worsened by surging food and energy costs after Russia’s invasion of Ukraine, and fallout from China’s zero-Covid measures.
To make borrowing more expensive, the Fed has raised interest rates seven times including four bumper 0.75-point increases. Asked if a “soft landing” for the economy remains achievable, Powell said this would be more likely if lower inflation readings persist.
Nancy Vanden Houten of Oxford Economics said: “The projections don’t explicitly call for a recession, although a rise in the unemployment rate by as much as the Fed now forecasts is consistent with a recession.” The Fed lifted its median jobless rate forecast to 4.6pc on Wednesday.
But Powell said: “I don’t think anyone knows whether we’re going to have a recession or not, and if we do, whether it’s going to be a deep one or not.”