Fed Raises Rate by 0.5 Percentage Point, Signals More Increases Likely
Most officials penciled in plans to raise rates above 5% next year, higher than previously expected
Most officials penciled in plans to raise rates above 5% next year, higher than previously expected
WASHINGTON—The Federal Reserve approved an interest-rate increase of 0.5 percentage point and signalled plans to lift rates through the spring, though likely in smaller increments, to combat high inflation.
The decision Wednesday marked a step down after four consecutive larger increases of 0.75 point and raised the benchmark federal-funds rate to a range between 4.25% and 4.5%, a 15-year high.
Markets retreated slightly after the announcement. The Dow Jones Industrial Average lost 142.29 points, or 0.4%, to 33966.35. The yield on the benchmark 10-year U.S. Treasury note edged up to 3.503% from its Tuesday level of 3.501%. Yields rise as prices fall.
The latest increase capped a year in which the Fed raised rates from near zero at the fastest pace since the early 1980s to fight inflation, which is running near a 40-year high.
Fed policy makers are entering a new phase of policy tightening in which they are trying to determine just how high to raise rates. Fed Chair Jerome Powell said in a news conference it was “broadly right” that slowing rate rises to more traditional quarter-percentage-point increments as soon as the Fed’s next meeting, Jan. 31-Feb. 1, would provide the best way to manage the risk of over-tightening.
“It makes a lot of sense, it seems to me—particularly if you consider how far we’ve come,” Mr. Powell said. But he said twice that the Fed hadn’t made any decisions about upcoming meetings, and that the outcome would depend on the state of the economy and borrowing costs.
Rate increases work with what economists call long and variable lags, which means the central bankers may not know for a year or more if they have tightened too much or not enough.
In new economic projections released after the meeting, most Fed officials penciled in plans to raise the fed-funds rate to a peak level between 5% and 5.5% in 2023 and hold it there until some time in 2024. In September, they anticipated lifting the rate to around 4.6% by the end of next year.
After Wednesday’s press conference, investors in interest-rate futures markets expected the Fed to raise rates to a level just below 5% by March before pausing. Bond markets rallied when Mr. Powell hinted the Fed might raise rates by a smaller step of a quarter-point, or 25 basis points, in February, said Lee Ferridge, a senior economic strategist at State Street Global Markets.
“It’s like the new projections didn’t happen, quite honestly. And I’m surprised the market is shrugging it off so confidently,” said Mr. Ferridge. “The expectation is the economic data will be so poor” by the end of the first quarter “that the Fed will stop hiking.”
Mr. Ferridge said he wasn’t convinced the Fed would dial down the pace of rate rises again in February. “If the data comes in hot, then I think they could still go 50,” he said.
Fed rate increases this year have hit asset prices and are causing a significant slowdown in rate-sensitive sectors of the economy such as housing. But in recent weeks, longer-term bond yields have tumbled as investors anticipate a speedy decline in inflation, possibly due to a recession next year.
The fed-funds rate influences other borrowing costs throughout the economy, including rates on car loans, mortgages and business debt.
Fed officials say they combat inflation primarily by slowing the economy through tighter financial conditions—such as higher borrowing costs, lower stock prices and a stronger dollar—that curb demand. As a result, any easing of financial conditions while the Fed continues to battle inflation could raise the risk of a deeper or longer downturn if it prompts the central bank to keep lifting rates.
Mr. Powell suggested the Fed would raise rates to higher levels for longer if broader financial conditions don’t “reflect the policy restraint that we’re putting in place to bring inflation down.”
The projections released Wednesday showed considerable divergence over what might happen after next year. Around one third of officials expect to hold the fed-funds rate above 4.5% through 2024. Most officials anticipate cutting rates by around 1 percentage point in 2024.
Mr. Powell said no officials had projected rate cuts next year and that they weren’t likely to consider lowering interest rates until policy makers are confident inflation is moving down to the Fed’s 2% goal in a sustained fashion.
Data released since the Fed’s November meeting have provided a mixed picture of the economy. While domestic demand has slowed and the housing market is entering a sharp downturn, the job market has remained strong and declines in gas prices could help sustain consumer spending.
Inflation has also slowed in the past two months. Consumer prices climbed 0.1% in November from the previous month and 7.1% from a year earlier, the Labor Department said Tuesday, both down notably from comparable previous increases.
The Fed pays close attention to so-called core prices, which exclude volatile food and energy categories, as a better predictor of future inflation than overall inflation. Over the past three months, core prices increased at a 4.3% annualised rate, the lowest such reading in more than one year.
Tuesday’s inflation report “provides a compelling case for downshifting to a 25-basis-point increase in February,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank.
“There are really good reasons for them to slow down if they can,” said Mr. Luzzetti. “I think they want to avoid pausing only to have to re-hike later, and getting down to 25 basis points allows them the best chance of avoiding that possibility.”
Mr. Powell acknowledged the improvement in the inflation rate but warned it might decline to levels that are still uncomfortably high, citing concerns that prices for labor-intensive services might rise if wage growth doesn’t slow down.
Prices of goods such as used cars are declining, a development the Fed has anticipated for more than a year, and there is evidence that rents and other housing costs are set to cool notably amid a sharp slowdown in the growth of new households.
“We welcome these better inflation reports…but I think we’re realistic about the broader project,” Mr. Powell said. Despite progress on goods and housing inflation, “the big story will really be the rest of it, and there’s not much progress there. And that’s going to take time.”
That pessimism was reflected in many Fed officials’ economic projections. Compared with September, they now anticipate a bigger increase in the unemployment rate next year and barely any economic growth.
Those projections offered “the whiff of a bumpy landing on the economic horizon,” said Daleep Singh, a former senior Fed official who is now chief global economist at PGIM Fixed Income.
Most officials expect making somewhat less progress on inflation next year than they had anticipated in September, which is one reason for projecting somewhat higher interest rates. Because central bankers believe inflation-adjusted or “real” policy rates are what matters for slowing the economy, a slower decline in inflation would require higher interest rates to achieve the same degree of economic restrictiveness.
They project core inflation, which excludes volatile food and energy categories, to fall from 5% on an annual basis in October to 3.5% at the end of next year, according to their preferred gauge, the Commerce Department’s personal-consumption expenditures index. That is up from their projection of 3% in September.
Wage growth hasn’t shown meaningful signs of slowing down, particularly as companies offer higher wages to attract new workers than they pay their current workers. Some Fed officials and private-sector economists are concerned that another calendar year of high inflation could lead employees to seek and receive higher pay early next year, which could help fuel more inflation.
Fed policy makers coalesced this spring around plans to raise rates by a half-percentage point at each meeting until they saw evidence inflation was slowing. Almost as soon as those plans came together, Mr. Powell decided to accelerate the increases amid fears that very high inflation would lead consumers and businesses to expect prices to keep climbing rapidly, causing high inflation to persist. The central bank lifted rates by 0.75 percentage point in June, the largest increase in 28 years.
At the time, Mr. Powell said such big moves would be uncommon. But continued high inflation and doubts in financial markets over the Fed’s commitment to fight it led the central bank to make three more increases of that magnitude.
“What’s impressed me to no end is it hasn’t broken anything. For all the talk of crashing the economy and breaking the financial markets, it hasn’t done that,” said Fed governor Christopher Waller last month, referring to the cumulative rate increases.
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Gold is outshining stocks, bonds and crypto. Here’s what’s driving the surge—and how to get in.
Give gold bugs their due. The yellow metal has been a light in the investing darkness. At a recent $3,406 per troy ounce, it’s up 30% this year, to the envy of stock, bond, and Bitcoin holders. Cash-flow purists will call this a flash in the pan, but they should look again. Over the past 20 years, SPDR Gold Shares , an exchange-traded fund, has surged 630%—85 points more than SPDR S&P 500 , which tracks shares of the biggest U.S. companies.
That isn’t supposed to happen. If businesses couldn’t be expected to outperform an unthinking metal over decades, shareholders would demand that they cease operations and hoard bullion instead. So, what’s going on? If this were gasoline or Nike shoes or Nvidia chips, we would look to supply versus demand. With immutable gold, nearly every ounce that has ever been found is still around somewhere, so price action is mostly about demand. That has been ravenous and broad since 2022.
That year, the U.S. and dozens of allies placed sweeping sanctions on Russia, including its largest banks, and China went on a bullion spree. Its buying has since cooled, but other central banks have stepped in. Perhaps this is unsurprising, in light of a decades-long diversification by finance ministers away from the U.S. dollar, which is down to 57% of foreign reserves from over 70% in 2000. But the recent uptick in gold stockpiling looks to JPMorgan Chase , the world’s largest bullion dealer, like a debasement trade. Investors are nervous about President Donald Trump’s tariffs, his browbeating of the Federal Reserve Chairman over interest rates, and blowout U.S. deficits.
It isn’t just bankers. Demand among individuals for gold bars and coins has been surging, with some dealers experiencing sporadic shortages. Gold ETFs were bucking the trend, but flows there have turned solidly positive since last summer, including recently in China. All told, there is now an estimated $4 trillion worth of gold held by central banks, and $5 trillion by private investors. Calculated against $260 trillion for all financial assets, including stocks, bonds, cash, and alternatives, that works out to a global gold portfolio allocation of 3.5%, a record.
What’s next? BofA Securities says that central banks have room for much more gold buying, and that China’s insurance companies are likely to dabble, too. RBC Capital Markets analyst Chris Louney says ETFs could drive demand growth from here, especially if angst reigns. “Gold is that asset of last resort…the part of the investing universe that investors really look for when they have a lot of questions elsewhere,” he says.
Russ Koesterich, a portfolio manager for BlackRock , a major player in ETFs including the iShares Gold Trust , says that gold has proven itself as a store of value, and deserves a 2% to 4% weighting for most investors. “I think it’s a tough call to say, ‘Would you chase it here?’ ” he says. “There have been some pullbacks. Those might represent a good opportunity, particularly for people who don’t have any exposure.”
Daniel Major, who covers materials stocks for UBS , points out that gold miners mostly haven’t wrapped themselves in glory in recent years with their dealmaking and asset management. As a result, a major index for the group is trading 30% below pre-Covid levels relative to earnings. UBS increased its 2026 gold price target by 23%, to $3,500 per troy ounce, before gold’s latest lurch higher. Many miners are producing at a cost of $1,200 to $2,000. Major has bumped up earnings estimates across his coverage. “I think we’re gonna see further upward revisions to consensus earnings,” he says. “This is what’s attractive about the gold space right now.”
Major’s favorite gold stocks are Barrick Gold , Newmont , and Endeavour Mining . More on those in a moment. We also have thoughts on how not to buy gold—and what not to expect it to do: Don’t count on it to keep beating stocks long term, or to provide precise short-term protection from inflation spikes and stock swoons. But first, a little history, chemistry, and rules of the yellow brick road.
The first gold coins of reliable weight and purity featured a lion and bull stamped on the face, and were minted at the order of King Croesus of Lydia, in modern-day Turkey, around 550 B.C. But by then, gold had been used as a show of riches for thousands of years. Ancient Egyptians called gold the flesh of the gods, and laid the boy King Tutankhamen to rest in a gold coffin weighing 243 pounds. The Old Testament says that under King Solomon, gold in Jerusalem was as common as stone. Allow for literary license; silicon, an element in most stones, is 28.2% of the Earth’s crust, whereas gold is 0.0000004%.
Marco Polo described palace walls in China covered with gold. Mansa Musa I of Mali in West Africa, on a pilgrimage to Mecca in 1324, is said to have splashed so much gold around Cairo on the way that he crashed the local price by 20%, and it took 12 years to recover. To Montezuma, the Aztec king whose gold lured Cortés from Spain, the metal was called, as it still is by some in Central Mexico, teocuitlatl —literally, god excrement. Golden eras, gold medals, the Golden Rule, and golden calf—so deep is the historical association between gold and wealth, excellence, and vice that it seems to have a mystical hold on humanity. In fact, it’s more a matter of chemical inevitability.
Trade and savings are easier with money. Pick one for the job from the 118 known elements. Years ago on National Public Radio, Columbia University chemist Sanat Kumar used a process of elimination. Best to avoid elements that are cumbersome gases or liquids at room temperature. Stay away from the highly reactive columns I and II on the periodic table—we can’t have lithium ducats bursting into flame. Money should be rare, unlike zinc, which pennies are made from, but not too rare, unlike iridium, used for aircraft spark plugs. It shouldn’t be poisonous like arsenic or radioactive like radium—that rules out more elements than you might think. Of the handful that are left, eliminate any that weren’t discovered until recent centuries, or whose melting points were too high for early furnaces.
That leaves silver and gold. Silver tarnishes, but rarer, noble gold holds its luster. It is malleable enough to pound into sheets so thin that light will shine through. And, despite the best efforts of Isaac Newton and other would-be alchemists, it cannot be artificially created—profitably, anyhow. Technically, there is something called nuclear transmutation. If you can free a proton from mercury’s nucleus or insert one into platinum’s, you’ll end up with a nucleus with 79 protons, and that’s gold. Scientists did just that more than 80 years ago using mercury and a particle accelerator. But what little gold they produced was radioactive. If you think you can do better, you’ll likely need a nuclear reactor to prove it, but a large gold mine is one-fifth the cost, and we have to believe the permitting is easier.
We passed over copper due to commonness, but it has become too valuable to use for pennies. The 95% copper content of a pre-1982 penny is worth about three cents today. The equivalent amount of silver goes for $3.10, and gold, more than $320. But the three trade in different units. A pound of copper is up 17% this year, at $4.72. Silver and gold are typically quoted per troy ounce, a measure of hazy origin and clear tediousness, which is 9.7% heavier than a regular ounce. A troy ounce of silver is $32.70, up 13% this year.
Confused? This won’t help: The purity of investment gold, called its fineness, is measured in either parts per thousand or on a 24-point karat scale. A karat is different from a carat, the gemstone weight, but our friends in the U.K.—who adopted troy ounces in the 15th century—often spell both words with a “c.” Gold bricks like the ones central banks swap are called Good Delivery bars, and weigh 400 troy ounces, give or take, worth more than $1.3 million. If you buy a few, lift with your legs; each weighs a little over 27 regular pounds (as opposed to troy pounds, which, it pains us to note, are 12 troy ounces, not 16).
There are many options for smaller players, like Canadian Maple Leaf coins, which are 24-karat gold; South African Krugerrands, at 22 karats, and alloyed with copper for durability; and Gold American Eagles, 22 karats, with some silver and copper. Proof coins cost extra for their high polish, artistry, and limited runs, and may or may not become collectibles. Humbler-looking bullion coins are bought for their metal value. Prefer the latter if you aren’t a coin hobbyist. Avoid infomercials and stick with high-volume dealers. Even so, markups of 2% to 4% are common. Costco Wholesale , which sells gold in single troy ounce Swiss bars, charges 2%, but often runs out, and limits purchases to two bars per member a day. Factor in the cost of storage and insurance, too.
ETFs are more economical. For example, iShares Gold Trust costs 0.25%, not counting commissions. For long-term holders, as opposed to traders, there is a smaller fund called iShares Gold Trust Micro , which costs 0.09%.
Resist fleeing stocks for gold. The surprisingly long outperformance of gold is mostly a function of its recent run-up. From 1975 through last year, gold turned $1 invested into about $16, versus $348 for U.S. stocks. That starting point has a legal basis. President Franklin Roosevelt largely outlawed private gold ownership in 1933; President Richard Nixon delinked the dollar from gold in 1971; and President Gerald Ford made private ownership legal again at the end of 1974.
Gold has been a so-so inflation hedge over the past half-century, and at times a disappointing one. In 2022, when U.S. inflation peaked at a 40-year high of over 9%, the gold price went nowhere. The problem is that high inflation can prompt a sharp increase in interest rates. “If people can clip a 5% coupon on a T-bill, often they’d prefer to do that than have either a lump of metal or an ETF that doesn’t produce cash flow,” says BlackRock’s Koesterich.
Likewise, while gold has generally offset stock declines this year, it hasn’t always done so in the heat of the moment. Recall tariff “liberation day” early this month, which sent U.S. stocks down close to 11% in three days and pulled gold down nearly 5%. “This isn’t an uncommon scenario,” says RBC’s Louney. “When investors were losing elsewhere in their portfolio, gold was sold as well to cover those losses.”
Our top tip on how gold behaves is this: It doesn’t. People do the behaving, and they are appallingly unreliable. Use bonds as a stock market hedge. If they don’t work, fall back to patience. For inflation protection, think of assets that are a better match than gold for the goods and services that you buy every week. A diversified commodities fund has precious metals but also industrial ones, along with energy and grains. Treasury inflation-protected securities are explicitly linked to the consumer price index, which measures inflation for a theoretical individual whose buying patterns differ from your own, but are close enough.
Own a house. Stick with a workaday, reliable car. Yes, cars deteriorate. But so does nearly everything on a long enough timeline. Rely mostly on stocks, which represent businesses, which wouldn’t endure if they couldn’t turn raw inputs like commodities into something more profitable. There’s even a miner, Newmont, in the S&P 500.
Speaking of which, UBS’ Major recently upgraded both Canada’s Barrick and Denver-based Newmont from Neutral to Buy. “Both very much fall into that category of having a challenging recent track record,” he says. Newmont has lost 20% over the past three years while gold has gained 76%, which Major blames on difficult acquisitions and earnings shortfalls. Barrick, down 8%, has been in a dispute with Mali since 2023, when its government instituted a new mining code that gives it a greater share of profits. In recent days, authorities have shut the company’s offices in the capital city of Bamako over alleged nonpayment of taxes.
These are the sort of headaches that Krugerrands in a safe don’t produce. But Major calls expectations “adequately reset,” free cash flow attractive, and guidance achievable. Newmont, at 13 times next year’s earnings consensus, is selling assets, and Barrick, at 10 times, has healthy production growth.
Major also likes London-based, Toronto-listed Endeavour Mining , up 40% over the past three years and trading at nine times earnings, although he says it has “higher jurisdictional risk.” It is focused on West Africa, especially Burkina Faso, which had a coup d’état in 2022. You’d think the stock would be doing worse amid such political upheaval. Then again, Burkina Faso since 1966 has had eight coups, five coup attempts, and one street ousting of a president who tried to change the constitution to remain in power. That works out to an uprising every four years, on average.
Montezuma’s scatological name for gold might have been prescient, considering the sometimes-odious consequences for small countries that find it.
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