Fed interest rate decision today: Central bank hikes by 0.25 percentage point to tame inflation

WASHINGTON--The Federal Reserve is easing its foot a bit further off the brake.

But it appears far from ready to step on the economy’s accelerator.

The Fed, as expected, raised its key short-term interest rate by a quarter percentage point Wednesday, throttling back from a half-point hike in December and acknowledging that a historic inflation spike is slowing.

“Inflation has eased somewhat but remains elevated,” the Fed said in a statement after a two-day meeting.

The central bank appears reluctant to signal that its aggressive campaign to beat back price increases is nearing an end even as it begins to balance the benefits of the initiative with growing recession risks.

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Still, Fed Chair Jerome Powell hinted that could halt its campaign after "a couple more rate hikes."

In its statement, the Fed repeated that “ongoing (rate) increases…will be appropriate” to bring down yearly inflation to the Fed’s 2% goal. Some economists expected the Fed instead to say “additional increases” would be needed, hinting the Fed is close to winding down the hiking cycle.

At a news conference, Powell said inflation "has moderated but remains too high."

"We still think there's work to be done there." he said. "We haven't made a decision on exactly where" rates will peak.

What is the Fed interest rate now?

The Fed’s latest move brings the federal funds rate to a range of 4.5% to 4.75%, up from near zero in March, in its boldest flurry of rate increases since the early 1980s.

Powell said the Fed ultimately could stop short of the level officials forecast in December or go beyond it, depending on how rapidly inflation falls. He initially said the central bank would rather err on the side of hiking too much to stamp out high inflation.

"I continue to think that it's very difficult to manage the risk of doing too little," he said.

Later, however,  Powell signaled that if inflation follows the course officials expect, the Fed is on track to push the Fed's key rate to the 5% to 5.25% ra ngeand then pause. That would require two more quarter point hikes -- in March and May.

"We're talking about a couple more rate hikes to get to that level that is sufficiently restrictive," he said,

Wednesday's hike is expected to further slow economic activity as it drives up rates for credit cards, adjustable rate mortgages and other loans. But Americans, especially seniors, are finally reaping higher bank savings yields after years of meager returns.

In recent weeks, Fed official have noted that inflation has cooled somewhat and another step down to a quarter point rate increase was likely after four straight three-quarter point hikes gave way to December’s half-point move.

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Will the Fed continue to raise rates in 2023?

The big question, though, is – How high will the Fed go?

In December, Fed officials’ median estimate had the federal funds rate peaking soon at a range of 5% to 5.25% -- a level that some economists believe is likely to tip the U.S. into recession – and staying there the rest of the year.

Markets, however, predict the central bank will pause after bumping the funds rate to 4.75% to 5% in March and begin cutting it by year’s end.

Asked if the Fed could stop before the rate hits 5% to 5.25%, Powell said Wednesday, "Certainly, it's possible," depending on inflation and labor market data over the next couple of months. "Absolutely it's possible."

"The end of the hikes is in sight," Ian Shepherdson, chief economist of Pantheon Macroeconomics wrote to clients, adding he believes the Fed will bump up rates, at most, by another quarter point in March.

Powell downplayed the chances of a rate cut in 2023 as the economy weakens. "Given our outlook, I don't see us cutting rates this year," he said, adding that could change if inflation moderates more quickly than anticipated.

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Is inflation expected to go down?

Reports in recent weeks have provided some ammunition for Fed officials who favor softening its stance. Inflation has eased more rapidly than projected, falling to 6.5% in December from 7.1% the previous month and a 40-year high of 9.1% in June.

Meanwhile, the economy is losing some steam. Job growth has declined to a still-solid average monthly pace of 247,000 the past three months from 366,000 the previous quarter. And retail sales and business investment fell late last year.

But Powell has said the central bank won’t halt its hiking campaign until it sees proof that wage growth is slowing in service industries like health care, education and restaurants. Price increases in those sectors account for the lion’s share of inflation, he said, and they’re tied mostly to labor costs.

"We will need substantially more evidence to be confident inflation is on a sustained downward path," Powell said Wednesday.

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What is the wage growth rate for 2022?

Compensation – including pay and benefits – increased 1% the last three months of the year, down from 1.2% in the third quarter and below economists’ estimates, the Labor Department said this week.

But wages and salaries were still up a robust 5.1% annually, a tick below the third-quarter gain.

And employers posted 11 million job openings in December, modestly below an all-time high and above the prior month’s 10.4 million and pre-pandemic level of about 7 million, Labor said Wednesday. Meanwhile, the share of adults working or looking for jobs was stagnant last year at about 62.3% after climbing back toward the pre-pandemic mark of 63.3% in 2021.

Powell has said he’s looking for a better balance of labor demand and supply to ensure wage growth is moderating.

"The labor market continues to be out of balance," he said Wednesday.

Another challenge the Fed faces is that a softer approach to rate hikes likely would juice stocks and tamp down mortgage rates and other borrowing costs, bolstering the economy. And that could push back against the Fed’s goal of bringing down inflation.

"We're going to be very cautious about declaring victory and sending signals that we think that the game is won," Powell said Wednesday.

Stock market today

Stocks indices turned slightly higher as of 2:50 p.m. ET. The Dow Jones Industrial Average edged up by 30 points or 0.09%, while the S&P 500 rose 33 points or 0.8%, and the Nasdaq Composite gained 177 points or 1.6%.

Stocks kicked off 2023 with a bang. The Dow gained nearly 3% last month while the S&P 500 and Nasdaq notched even bigger gains.

The tech-heavy Nasdaq had its best January since 2001.

Fed live stream

You can watch Powell speak at 2:30 p.m. ET by clicking the following link.

When will the Fed raise rates again?

After today's expected rate hike, it's likely that the Fed will raise rates again at its March meeting barring any dramatic shifts in inflation.

FOMC acronym: What does it stand for?

An acronym you're bound to hear a lot today is FOMC. That stands for Federal Open Market Committee. The FOMC is a group of 12 people who vote on interest rate decisions.

Seven of the 12 people are on the Board of Governors at the Fed (that includes Fed Chair Powell). Another seat is filled by the President of the New York Fed and the remaining four seats are a rotating group of presidents from the 11 other regional Fed banks.

Federal Reserve interest rate history in 2022

There were seven rate hikes in 2022. Four of the seven hikes were in 75 basis-point hikes, two were 50 basis-point hikes and one was a 25 basis-point hike.

Stock market today

Stocks are trading near session lows of the Fed decision. As of 12:51 p.m. ET the Dow Jones Industrial Average was down by 1% while the S&P 500  was down by 0.6% and Nasdaq Composite was down by 0.3%.

GDP report shows economy still expanding

Despite ongoing fears of a recession, the U.S. economy is still growing, albeit at a much slower pace than in 2021.

In the last quarter of 2022, the nation’s gross domestic product, the value of all goods and services produced in the U.S., expanded at a seasonally adjusted annual rate of 2.9%. The gains can be traced to solid consumer spending and business stockpiling.

Overall in 2022, the economy grew 2.1% following a 5.9% advance the prior year that was juiced by an easing pandemic.

Stagflation

Stagflation happens when economic growth is sluggish while inflation is high. The term lacks a formal definition or specific threshold, but elements include high unemployment and a weakened economy as prices climb.

Some economists worry that the U.S. will enter a period of stagflation since prices remain high and layoffs are mounting. But so far the U.S. unemployment rate is at a historic low.

Current interest rates for car loans

Interest rates for auto loans have risen since the Fed began hiking rates.

Here are the latest average interest rates for auto loans according to Bankrate data:

• 60-month new car: 6.18%

• 48-month new car: 6.17%

• 48-month used car: 6.83%

• 36-month used car: 6.49%

Interest rates today for 30-year fixed mortgage

As the Fed hiked interest rates, 30-year fixed-rate mortgages shot up in 2022 as the Fed hiked interest rates.

At the start of last year, average 30-year fixed-mortgage rates hovered around 3%, according to Freddie Mac data. Now they're double that. However, they've come down from a November peak of over 7%, the highest level since 2002.

The fall in mortgage rates is spurring demand from homebuyers, USA TODAY's Bailey Schulz reported citing recent data from the Mortgage Bankers Association.

The housing market cooled tremendously over the last year from the pandemic-era housing boom the Fed's low-interest rate environment ignited.

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Fed already has January jobs report data

The first jobs report of the year is due on Friday. But members of the Fed won't have to wait until then to know what the unemployment rate was last month. They've already received crucial data from the report that will be used to inform their interest rate decision, the Bureau of Labor Statistics confirmed with USA TODAY.

Fed Chair Powell and other Fed officials cannot disclose any information they've received from the jobs report ahead of its release.

Economists surveyed by Dow Jones forecast that employers added 187,000 jobs last month, a decline from December's 223,000 job gain. The slowdown in hiring would push the unemployment rate up to 3.6% from its current level of 3.5%, according to forecasts.

PCE inflation

The latest reading of the Fed's preferred inflation gauge, the PCE price index, found that prices are 5% higher than a year ago. That's the lowest annual rate of inflation since September 2021.

JOLTS report

A fresh read of the labor market was just released.

The Job Openings and Labor Turnover Survey (JOLTS) showed that there were 11 million vacancies in December. That exceeded economists' expectations by nearly 1 million vacancies.

The Fed has been keeping a close eye on the report for signs of a labor market slowdown. Fed Chair Powell has repeatedly said that vacancies are too high and need to come down so that the labor supply is better aligned with demand.

Will interest rates go down in 2023?

At the Fed's last meeting in December, no Fed official said they expect rate cuts in 2023. That said some mortgage rates are coming down.

CPI report

The next CPI report will be released in about two weeks on Feb. 14.

Bitcoin price

Bitcoin is down slightly this morning. But overall, the cryptocurrency is having a stellar month. It's up nearly 40%.

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How Fed rate hikes impact credit card rates

The interest rates banks charge on their credit cards are tied to the prime rate, which is tightly linked to the Fed funds rate.

As the prime rate has risen to 7.5%, the average credit card interest rate has risen from 14.6% in February 2022 to 19.9% last week, according to Bankrate. That has raised monthly interest charges by about $29 to $108 on the average American's $6,965 credit card balance.

To see how the Fed's rate hikes have impacted other areas of the economy like home sales, the stock market and more be sure to read Jim Sergent's piece.

Inflation definition

The Fed's decision today is largely going to be influenced by inflation.

Inflation is when prices for goods and services rise across the board. If, for instance, gas prices go up a lot but overall prices remain stable the economy would not be experiencing inflation.

Is inflation going down?

The two main U.S. inflation measures, the Consumer Price Index and the Personal Consumption Expenditures price index, are easing. 

The latest CPI report found prices for goods and services were 6.5% higher than a year ago. That's a sizeable improvement from June when annual inflation was over 9%. On a monthly basis, consumer prices fell by 0.1% in December, the first decline since May 2020.

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When is the next Fed meeting?

The Fed's next meeting is from March 21 to 22.

Fed 2023 meeting schedule

Here are the remaining meetings for the year:

• May 2-3

• June 13-14

• July 25-26

• September 19-20

• Oct/Nov 31-1

• December 12-13

Elisabeth Buchwald is a personal finance and markets correspondent for USA TODAY. You can follow her on Twitter @BuchElisabeth and sign up for our Daily Money newsletter here

This article originally appeared on USA TODAY: Fed meeting: Federal Reserve hikes interest rate to curb inflation