Fed Approves Quarter-Point Rate Hike, Signals More Increases Likely
Officials are slowing interest-rate increases as they debate when to pause
Officials are slowing interest-rate increases as they debate when to pause
WASHINGTON—The Federal Reserve approved an interest-rate increase of a quarter-percentage-point and signalled plans to raise rates again next month to continue lowering inflation.
The decision Wednesday followed six consecutive rate rises that were larger, including an increase of a half-point in December and a 0.75-point increase in November.
Officials nodded to recent improvement in inflation readings but didn’t significantly alter their guidance in a policy statement released after the meeting regarding coming rate moves.
“The committee anticipates that ongoing increases” in interest rates “will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive,” said the statement, using the same language included in policy statements since last March.
The latest increase caps a year in which the Fed lifted its benchmark federal-funds rate from near zero to a range between 4.5% and 4.75%, a level last reached in 2007. That extends the central bank’s most rapid pace of rate increases since the early 1980s to fight inflation, which hit a 40-year high last year.
One big question heading into Wednesday’s meeting was the extent to which recent economic data had given Fed officials more confidence that inflation and wage pressures had peaked.
In December, most of them penciled in raising the fed-funds rate to a range between 5% and 5.25% this year. After the hike they approved Wednesday, that projection would imply additional quarter-point increases at the Fed’s meetings in March and May, followed by a pause in rate rises.
Many officials had repeated in recent weeks that they still saw such a rate path as appropriate given strong wage pressures, a tight labour market and high service-sector inflation. But officials also said they would base their decisions on how the economy performs in the coming months.
“We can now say for the first time, the disinflationary process has started,” said Fed Chair Jerome Powell at a news conference after Wednesday’s meeting. But he added, “The job is not fully done.”
Mr. Powell said the central bank was trying to manage the risk of raising rates too much and causing unnecessary economic harm with that of not doing enough to bring down inflation. In repeating his longstanding view that the latter mistake would be harder to fix, Mr. Powell said he didn’t want to be in a position where six or 12 months from now, after a halt to raising rates, the Fed would belatedly conclude that it hadn’t done enough to bring down inflation this year and would have to raise rates higher.
“We’re going to be cautious about declaring victory and sending signals that we think the game is won,” he said. “Certainty is just not appropriate here.”
The fed-funds rate influences other borrowing costs throughout the economy, including rates on mortgages, credit cards and auto loans. The Fed is raising rates to cool inflation by slowing economic growth. It believes those policy moves work through financial markets by tightening financial conditions, such as by raising borrowing costs or lowering prices of stocks and other assets.
Officials have been guarded in recent weeks about providing any guidance that might ignite market rallies that could undermine their efforts to fight inflation.
In recent weeks, markets have rallied partly because investors anticipated that the Fed would slow its rate increases this week and remove uncertainty over the rate outlook, which reduces interest-rate volatility. Lower volatility can ease financial conditions.
Markets have also been cheered by news that inflation and wage growth might have peaked last year, which could make the Fed more comfortable in pausing rate increases. Since Fed officials met in December, economic activity has been mixed. Consumer spending has moderated, and manufacturing activity has weakened. But hiring has held steady, pushing the unemployment down to 3.5% in December, a half-century low.
Investors in bond markets increasingly expect that the Fed will cut interest rates later this year because of a sharp slowdown in economic activity that lowers inflation faster than policy makers expect.
Fed officials and some economists, meanwhile, are concerned that the recent decline in inflation could reflect the long-anticipated easing of supply-chain bottlenecks—and that might not be enough to bring inflation down to the Fed’s 2% goal.
“I’m somewhat worried that the market view is based more on hope,” said Karen Dynan, an economist at Harvard University who served in the Obama administration. “Labor markets still look really tight.”
Officials’ deliberations over how much more to raise rates this year and how long to hold rates at some higher level could hinge over how much they think their past increases will slow the economy this year. Debates could also turn on the degree to which wage and price pressures might slow without significant weakness in the job market.
Officials agreed to slow rate rises to gain more time to study the effects of their moves.
Inflation fell to 4.4% in December from 5.2% in September, as measured by the 12-month change in the personal consumption expenditures price index excluding food and energy. Though still above the Fed’s 2% goal, it moderated in the October-to-December period to an annualised 2.9% rate.
“Inflation has eased somewhat but remains elevated,” said the Fed’s policy statement.
Overall inflation is slowing largely because prices of energy and other goods are falling. Large increases in housing costs have slowed, but haven’t filtered through to official price gauges yet. As a result, Mr. Powell and several colleagues shifted attention recently toward a narrower subset of labor-intensive services by excluding prices for food, energy, shelter and goods.
Mr. Powell has said prices in this category, which rose 4% in December from a year earlier, offer the best gauge of higher wage costs passing through to consumer prices.
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China’s economic recovery isn’t gaining the momentum money managers are awaiting.
Data from China Beige Book show that the economic green shoots glimpsed in August didn’t sprout further in September. Job growth and consumer spending faltered, while orders for exports came in at the lowest level since March, according to a monthly flash survey of more than 1,300 companies the independent research firm released Thursday evening.
Consumers’ initial revenge spending after Covid restrictions eased could be waning, the results indicate, with the biggest pullbacks in food and luxury items. While travel remains a bright spot ahead of the country’s Mid-Autumn Festival, hospitality firms and chain restaurants saw a sharp decline in sales, according to the survey.
And although policy makers have shown their willingness to stabilise the property market, the data showed another month of slower sales and lower prices in both the residential and commercial sectors.
Even more troubling are the continued problems at Evergrande Group, which has scuttled a plan to restructure itself, raising the risk of a liquidation that could further destabilise the property market and hit confidence about the economy. The embattled developer said it was notified that the company’s chairman Hui Ka Yan, who is under police watch, is suspected of committing criminal offences.
Nicole Kornitzer, who manages the $750 million Buffalo International Fund (ticker: BUIIX), worries about a “recession of expectations” as confidence continues to take a hit, discouraging people and businesses from spending. Kornitzer has only a fraction of the fund’s assets in China at the moment.
Before allocating more to China, Kornitzer said, she needs to see at least a couple quarters of improvement in spending, with consumption broadening beyond travel and dining out. Signs of stabilisation in the housing market would be encouraging as well, she said.
She isn’t alone in her concern about spending. Vivian Lin Thurston, manager for William Blair’s emerging markets and China strategies, said confidence among both consumers and small- and medium-enterprises is still suffering.
“Everyone is still out and about but they don’t buy as much or buy lower-priced goods so retail sales aren’t recovering as strongly and lower-income consumers are still under pressure because their employment and income aren’t back to pre-COVID levels,” said Thurston, who just returned from a visit to China.
“A lot of small- and medium- enterprises are struggling to stay afloat and are definitely taking a wait-and-see approach on whether they can expand. A lot went out of business during Covid and aren’t back yet. So far the stimulus measures have been anemic.”
Beijing needs to do more, especially to stabilise the property sector, Thurston said. The view on the ground is that more help could come in the fourth quarter—or once the Federal Reserve is done raising rates.
The fact that the Fed is raising rates while Beijing is cutting them is already putting pressure on the renminbi. If policy makers in China wait until the Fed is done, that would alleviate one source of pressure before their fiscal stimulus adds its own.
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