The Federal Reserve slows the pace of rate hikes with a 0.5-point rise to 4.5%

The Federal Reserve ends the year with a new rise in interest rates, the eighth of 2022. The US central bank announced this Wednesday that it is raising the federal funds rate by 0.5 points, to the range of 4.25% -4.5%, to combat inflation.

After four consecutive increases of 0.75 points, Jerome Powell believes that it is time to slow down and see how the tightening of monetary policy unfolds its effects.

The latest news, with inflation falling to 7.1%, is encouraging.

Even so, the members of the committee that sets monetary policy themselves foresee that rates will exceed 5% in 2023.

The central bank suggests that additional rate hikes will be necessary.

“The committee anticipates that continued increases in the target range will be appropriate to achieve a monetary policy stance tight enough to bring inflation back to 2% over time.

To determine the pace of future increases in the target range, the committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. says the statement without giving many clues, pending Powell's press conference.

The move on Wednesday was widely expected.

The president of the Federal Reserve already argued in advance on November 30 the reasons for a somewhat smaller increase: "The full effects of a rapid tightening [of monetary policy] have not yet been felt so far, so it has to It makes sense to moderate the pace of our rate hikes as we get closer to the level of tightening that will be enough to bring inflation down.”

The question now is how far the rate hikes will go and for how long it will be necessary to maintain a restrictive monetary policy to control the price rises.

The forecasts of the members of the Federal Reserve suggest that the rate rise will reach a ceiling of 5.1%, that is, in the range of 5%-5.25%, in 2023, to then lower the rates by one point. in 2024 and another, in 2025.

Although after four consecutive increases of 0.75 points, the movement of 0.50 points may seem like a small thing, in reality the Fed's monetary policy committee had not approved any of that amount since May 2000 until this year.

The central bank had become accustomed to small movements, of 0.25 points, even if they were repeated (in 2005 it raised rates eight times that quarter of a point).

But when Powell saw that he had misdiagnosed the price hikes as temporary and inflation soaring to the highest levels in four decades, he decided to act aggressively.

The Federal Reserve is trying to achieve a soft landing for the economy.

It wants to curb demand long enough for inflationary pressures to ease, but not so much that it triggers a full-blown recession.

Still, given the choice, Powell has made it clear that his priority is price stability and that he is willing to cause a recession if necessary to achieve it.

For now, the US economy is showing signs of resilience, especially in the labor market.

The United States has chained 23 consecutive months of job creation and the unemployment rate is at 3.7%, very close to the minimum of the last half century.

However, at the same time, both in the real estate market (very sensitive to the price of money) and in some other sectors, some signs of economic weakening are beginning to be seen.

Inflation remains a long way from the central bank's 2% target, but the latest declines in the year-on-year rate offer some hope that there is room for such a soft landing.

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