The Federal Reserve Open Market Committee (FOMC) lifted the federal funds rate to the 4.5% to 4.75% range and will continue its balance sheet runoff.
The Fed kept its characterization of growth and the labor market unchanged – growth is modest and job gains have been robust. But, it updated its language on inflation to “Inflation has eased somewhat but remains elevated.”
On the future path of policy, it “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.”
All of the members of the FOMC voted in favor of the decision.
Key Implications
The Fed has once again slowed the pace of rate hikes as it attempts to digest the evolution of incoming economic data. With sentiment measures falling and consumer spending starting to slow, momentum points to economic weakness in the months ahead. At the same time, inflation has continued to improve. Given the current pace, core PCE inflation is likely to trend below 3% by the second half of this year.
Recent Fed speeches have shown that members want rates at 5%+ in order to ensure inflation is headed towards the 2% target. We will hear from Chair Powell shortly, but all signs are pointing to another 25 basis-point hike in March. How many more hikes after that is hotly debated. Though we think incoming economic data will slow enough for the Fed to move to the sidelines, it has remained steadfast in its bias towards higher and higher rates.
