Fed delivers the expected 25 bps rate hike. What’s next?

As expected, the Federal Reserve slowed the rate hikes in 2023 amid cooling inflation data, sparking hopes of a recovery for the housing market this year. The Federal Open Market Committee (FOMC) on Wednesday afternoon decided to raise the federal funds rate by 25 basis points to the 4.50%-4.75% range. The decision follows four subsequent 75 basis point increases, which occurred in June, July, September, and November, and a 50 basis point increase in December. The Fed started to hike rates in March 2022 in order to pull inflation back to the 2% target. Prices had increased significantly based on supply and demand imbalances related to the Covid-19 pandemic and Russia’s war against Ukraine. However, the Consumer Price Index (CPI) rose by 6.5% in December compared to one year ago, according to the Bureau of Labor Statistics — the latest sign that inflation is cooling. That’s the smallest 12-month increase in the index since the year ending in October 2021. According to the FOMC, recent indicators point to modest growth in spending and production, robust job gains in recent months, low unemployment rate and elevated inflation. Meanwhile, Russia’s war against Ukraine is causing economic hardship and elevating global uncertainty. “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% over time,” the FOMC said in a statement. The FOMC said it will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. Fed Chairman Jerome Powell told journalists on Wednesday afternoon the U.S. economy slowed significantly last year – and the expectation is that growth will continue at a “fairly subdued” level in 2023. Powell mentioned that the recent developments regarding inflation are encouraging, but that’s not grounds for complacency. Fed officials need “substantially more evidence to be confident that inflation is in a sustained downward path,” according to Powell. “Shifting (the rates hikes) to a slower pace will better allow the committee to assess the economy’s progress toward our goals, as we determine the extent of future increases required to attain sufficiently restrictive stance,” Powell said. Regarding the Fed’s next steps, Powell said it’s difficult to manage the risk of doing too little and finding out six or 12 months later that they were close but didn’t get the job of bringing inflation to the 2% target done. Meanwhile, Powell added that the Fed has no incentive or desire to overtighten. 

Source: HousingWire