Fed approves 0.25% hike, softening rate increases again
The Fed has raised interest rates to cut prices but the move risks a recession.
ABC NEWS—The Federal Reserve said Wednesday it was raising its short-term borrowing rate another 0.25%, the central bank’s second consecutive decision to slow rate increases while extending an effort to cool the economy and dial back inflation.
The Fed has put forward a string of borrowing cost increases as it tries to slash price hikes by slowing the economy and choking off demand. The approach, however, risks tipping the U.S. economy into a recession and putting millions out of work.
In a statement, the Federal Reserve said it remains “highly attentive to inflation risks,” adding that the benchmark interest rate would require “ongoing increases” to bring inflation down to normal levels.
At a meeting in December, the Fed raised its short-term borrowing rate a half-percentage point, pulling back from three consecutive 0.75% increases and signaling confidence that sky-high inflation could be brought down to normal levels.
The Fed matched economist expectations with the 0.25% rate hike on Wednesday.
The decision comes weeks after a government report showed that inflation slowed in December, marking six consecutive months of easing price increases.
Consumer prices rose 6.5% over the yearlong period ending in December, which amounts to a significant slowdown from a summer peak but remains more than triple the Fed’s target inflation rate of 2%.
The Fed is still “strongly committed to returning inflation to its 2% objective,” the central bank said in a statement on Wednesday.
Cooling inflation has spurred optimism that the U.S. economy may avert a recession. In a report on Monday, the International Monetary Fund projected that U.S. economic growth would slow this year but that the U.S. could still avoid a downturn.
Further, government data last week showed that the U.S. economy grew robustly at the end of last year, defying concerns about an imminent recession.
Still, most economists expect a recession later this year, as interest rate hikes weigh on the economy, according to a survey released by Bloomberg last week. Forecasters expect gross domestic product to fall over the second and third quarters of this year, the survey found.
Growing evidence suggests the Fed’s rate hikes have put the brakes on some economic activity.
Home sales fell for the 11th consecutive month in December, reaching their lowest rate since November 2010, according to the National Association of Realtors.
Meanwhile, U.S. retail sales fell in December, ending the typically busy holiday shopping season with a whimper. Year-over-year retail sales dropped by about 1% last month, extending a nearly identical fall in November.
So far, however, the labor market has proven resilient, buoying the hopes of policymakers seeking to cool prices without causing significant job losses.
In December, employers added 233,000 jobs and wages grew a strong 4.6% compared to a year earlier.