Federal Reserve Interest Rate Increase of .25 Brings Benchmark Rate to its Highest Level Since 2007.
The Federal Reserve raised short-term interest rates Wednesday by a quarter percentage point, bringing its benchmark rate to a new range of 4.50% and 4.75%, the highest level since October 2007.
The central bank acknowledged the slowdown in inflation and continues to assess the impact of its interest rate hikes on consumer prices in its statement on Wednesday. The Fed raised rates by 25 basis points, marking a further slowdown in the pace of rate increases after raising rates by 50 basis points in December and 75 basis points at each of its four meetings from June to November, the fastest pace since the 1980s.
Fed officials acknowledged that “inflation has eased somewhat but remains elevated.” They no longer cited Russia’s war in Ukraine as contributing to inflation but stated that it contributes to elevated global uncertainty. The Fed maintained its language in the policy statement that ongoing increases in interest rates will likely be appropriate to obtain a monetary policy stance that is “sufficiently restrictive,” countering the recent easing in financial conditions resulting from higher stock prices and a moderation in Treasury and other bond rates.
In determining the extent of future rate hikes instead of the pace, the Fed will consider lags in monetary policy and its impact on inflation, the economy, and financial markets. Wednesday’s decision was unanimous.
Behind the Decision to Raise Interest Rates
The latest inflation numbers showed easing for the past three months, though still much higher than the Fed’s 2% target. The Fed’s preferred measure of inflation, the personal consumption expenditures index excluding food and energy, increased 4.4% in December from the previous year, a slower rate of increase since October 2021.
The consumer price index excluding food and energy prices inched up 0.3% in December, after rising 0.2% in November. Year-over-year, the core CPI rose 5.7%, a decrease from the 6% seen in November.
The Fed reaffirmed its commitment to its longer-run goals and monetary policy strategy for stable prices, maximum employment, and moderate long-term interest rates, as is customary at the beginning of each year.