Fed plans to keep raising interest rates in 2023 but at a slower pace

Officials at Dec. 13-14 FOMC meeting agreed to continue increasing the cost of credit in 2023 but gradually to limit economic growth risks.

The FOMC meeting declared:

“No participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023.” 

 According to the minutes of the meeting, released on January 4, policymakers were still concerned about controlling the pace of price increases.

Considering the persistently high level of inflation, the attendees cautioned against prematurely loosening monetary policy, citing historical experience. The meeting participants saw a number of uncertainties abroad regarding inflation, including China’s relaxation of zero-COVID policies, Russia’s continued war against Ukraine, and the effect of synchronized policy firming by major central banks.

However, the officials maintained that financial conditions eased and made “significant progress” over the period following several “months of tightening.”

In the meeting, officials appeared to be considering lower rate hikes at the Jan. 31/Feb. 1 meeting, as the session revealed:

“Most participants emphasized the need to retain flexibility and optionality when moving policy to a more restrictive stance.” 

In addition, central bank communications indicate a slower pace of policy rate increases contributed to “improved sentiment,” according to officials. The committee also believes:

“A slowing in the pace of rate increases at this meeting would better allow the Committee to assess the economy’s progress … as monetary policy approached a stance that was sufficiently restrictive.”

Despite this, officials remained open to higher rates than expected if inflation persists.

The minutes emphasize that investors and the general public should not interpret the move to smaller rate increases as a weakening of the central bank’s commitment to bring inflation back to 2%.

During last month’s Fed meeting, the Fed increased rates by 50 basis points, a decline from its consistent rate hikes of 75 basis points throughout 2022. The US inflation rate stands at  7.1% as of November 2022, well above the Fed’s target.