After four straight three-quarter-point interest rate hikes, the Federal Reserve is set to announce a smaller half-point increase in its key rate Wednesday, a first step toward dialling back its efforts to combat inflation.
At the same time, the Fed is expected to signal that it plans more hikes next year than it had previously forecast to try to conquer the worst inflation bout in four decades. And most economists think Chair Jerome Powell will stress that the Fed will likely keep its benchmark rate at its high point through next year, even after the hikes have ended.
The Fed's decision Wednesday will follow a government report Tuesday that provided hopeful signs that
inflation is finally easing from chronically high levels. Gas prices fell, the cost of used cars, furniture and toys declined, and the costs of services from hotels to airfares to car rentals dropped.
The six rate hikes the Fed has already imposed this year have raised its key short-term rate to a range of 3.75 percent to 4 percent, its highest level in 15 years. Cumulatively, the hikes have led to much costlier borrowing rates for consumers as well as companies, ranging from mortgages to auto and business loans. Worries have grown that the Fed is raising rates so much in its drive to curb inflation that it will trigger a recession next year.
Yet with price increases still uncomfortably high — inflation was 7.1 percent in November compared with a year earlier — Powell and other Fed officials have underscored that they expect to keep rates at their peak for an extended period.
With inflation pressures now easing, though, most economists think the Fed will further slow its hikes and raise its key rate by just a quarter-point at its next meeting early next year.
“The data (Tuesday) kind of fits with our idea that the Fed will downshift further in February," said Matthew Luzzetti, an economist at Deutsche Bank and a former research analyst at the Fed. “Downshifting helps to maximize their prospects of a soft landing,” in which the Fed's rate hikes would slow growth and tame inflation but not tip the economy into a recession.
On Wednesday, members of the Fed’s rate-setting committee will also update their projections for interest rates and other economic barometers for 2023 and beyond. Most analysts have forecast that they will pencil in a peak range of at least 4.75 percent to 5 percent, or even 5 percent to 5.25 percent, up from their September forecast of 4.5 percent to 4.75 percent.
(With text inputs from AP)
(Edited by : Abhishek Jha)
