Federal Reserve raises interest rates by 25 basis points

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The Federal Reserve hiked interest rates by 25 basis points during the recent Federal Market Open Committee (FOMC) meeting. The Fed noted that the interest rate hikes have cooled down inflation, and interest rates would still be increased further and remain relatively high in 2023.

Fed hikes interest rates by 25 basis points

The Federal Reserve seems to be scaling back from the aggressive interest rate hikes reported in 2022. While inflation levels have dropped significantly, the Fed noted that the market should anticipate more future increases. Moreover, the policymakers did not provide information on when these hikes would be paused.

The Chair of the Federal Reserve, Jerome Powell, has addressed the “disinflationary” process that was currently happening. While he reiterated that more hikes would be seen in the future, financial markets rose on the 25 bps hike, with investors hopeful that more cuts were coming.

Powell noted that while inflation levels were dropping, the public needed to expect that interest rates would continue increasing as the disinflationary process started. The inflation data released in the United States shows that the prices of goods were slowing down, and the shortages caused by the pandemic were easing as the supply chains recovered.

Inflation remains above the Federal Reserve target

Inflation levels in the United States hit a 40-year high in 2022. However, the aggressive interest rate hikes by the Federal Reserve have eased these inflation levels, which dropped to 5% in December. Despite this drop, the inflation level remains significantly above the Fed target of 2%.

Powell noted that despite this drop, the economy was still in the early stages of disinflation. The Fed was being cautious before dropping the interest rate hikes altogether, with Powell reiterating that there was still “a long way to go.”

While some parts of the economy have reflected the slowing inflation, some segments are yet to see the drop in inflation. The Fed chair noted that there was a large number of job openings and high wage increases, signaling that the labor market was still tight. He also predicted that the level of unemployment needed to increase from the current 3.5% to bring inflation down to the Fed target of 2%.

Nevertheless, Powell’s speech was bullish for financial markets, marking the first time that policymakers have acknowledged that inflation is slowing. In the past year, the Fed attributed the rising inflation to the COVID pandemic, but this was not a concern during the recent speech. The Fed also noted that the ongoing war in Ukraine was not a source of inflation but only causing global uncertainty.

The Fed started hiking interest rates in March last year. The total interest rate hikes now stand at 4.5%, with the policy rate being between 4.5% and 4.75%. This is the highest rate since 2007, and it significantly affects the borrowing costs for car loans and mortgages.

 

About Ali Raza PRO INVESTOR

Ali is a professional journalist with experience in Web3 journalism and marketing. Ali holds a Master's degree in Finance and enjoys writing about cryptocurrencies and fintech. Ali’s work has been published on a number of leading cryptocurrency publications including Capital.com, CryptoSlate, Securities.io, Invezz.com, Business2Community, BeinCrypto, and more.