The Federal Reserve dialed back the pace of its inflation-fighting effort on Wednesday as officials seek a delicate balance between taming prices and avoiding a sharp recession.
The rate-making Federal Open Market Committee hiked its benchmark interest rate by a half percentage point following a two-day meeting.
The hike moved the federal funds rate’s target range to between 4.25% and 4.50% — its highest since December 2007.
The half-point hike marked a slowdown for the Fed, which had implemented supercharged three-quarter-point increases at four consecutive policy meetings through November.
However, the latest hike marked just the fifth time in the last 22 years the Fed has raised rates by more than a quarter percentage point. All five instances have occurred this year.
The smaller hike could assuage concerns among business leaders and investors who have grown increasingly fearful that the Fed will drive the economy into a steep recession through ongoing interest rates hikes. Uncertainty about the Fed’s policy path has stoked volatility in the stock market for months.
The smaller increase was widely expected among investors. Ahead of the Fed’s announcement, the market was pricing in an 82% probability of a half-point increase and just an 18% probability of a larger three-quarter percentage point hike.
The Fed’s decision came one day after the latest Consumer Price Index showed prices rose 7.1% in November – the slowest pace in a year. On a monthly basis, inflation rose just 0.1% from October to November.
During a speech in late November, Fed Chair Jerome Powell signaled the central back could slow the pace of its policy tightening effort by as soon as December. He also acknowledged that the Fed would likely need to lift rates higher than officials initially expected to bring inflation back down to the 2% target level.
At present, the market expects the benchmark rate to peak just below 5% in March.
The Fed’s policy actions affect nearly every element of the broader economy, affecting credit card interest rates, auto loans, savings accounts, and more. They have also have an indirect but significant effect on mortgage rates, which have more than doubled this year.
The torrid pace of hikes this year have caused a rapid cooling in the US housing market. Home sales volume has cratered, while experts have warned that prices could fall by 20% from their recent peaks.
Billionaire Elon Musk and JPMorgan Chase boss Jamie Dimon were among those who have called out a potential recession risk associated with interest rate hikes.
Last week, Musk warned that an economic recession “will be greatly amplified” if policymakers moved forward with another rate hike.
Treasury Secretary Janet Yellen, who had long downplayed the likelihood of a recession, acknowledged last Sunday that she saw a “risk” of a downturn in the months ahead.
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