Fed Still Has ‘Some Ways to Go’

Chair Jerome Powell said the Federal Reserve is not close to ending its anti-inflation campaign of interest-rate increases, as officials signaled borrowing costs will head higher than investors expect next year.

“We still have some ways to go,” he told a press conference on Wednesday in Washington after the Federal Open Market Committee (FOMC) raised its benchmark rate by 50 basis points (bps), to a target range of 4.25 percent to 4.5 percent. Policymakers projected that rates would end next year at 5.1 percent, according to their median forecast, before being cut to 4.1 percent in 2024—a higher level than previously indicated.

Powell said the size of the rate increase delivered on February 1, at the Fed’s next meeting, will depend on incoming data—leaving the door open to another half-percentage-point move or a step down to a quarter-point—and he pushed back against bets that the Fed will reverse course next year.

“I wouldn’t see us considering rate cuts until the committee is confident that inflation is moving down to 2 percent in a sustained way,” he said. “Restoring price stability will likely require maintaining a restrictive policy stance for some time,” he said.

The S&P 500 index dropped as investors digested the news.

“The committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time,” the FOMC said in its statement, repeating language it has used in previous communications.

Investors had been speculating that the Fed would soon pause its hikes after financial conditions eased. Until Wednesday, stocks had risen, while mortgage rates and the dollar had fallen since Powell last month suggested a policy shift was coming. They’d also bet rates would reach about 4.8 percent in May, followed by cuts totaling 50 bps in the second half of the year.

The vote was unanimous. The decision follows four consecutive 75 bps rate hikes, which boosted rates at the fastest pace since Paul Volcker led the central bank in the 1980s.

“It is our judgment today that we are not at a sufficiently restrictive policy stance yet,” the Fed chief said. “We will stay the course until the job is done.”

Powell had previously signaled plans to moderate hikes, while emphasizing that the pace of tightening is less significant than the peak and the duration of rates at a high level.

‘It’s Going to Take a While’

“It’s going to take a while to for the Fed to achieve what they want to achieve,” former New York Fed President William Dudley said in an interview on Bloomberg Television. “They have to slow the economy down sufficiently to generate enough slack in the labor market so wage trends come down to be consistent with 2 percent inflation.”

Consumer-price increases have begun a more pronounced slowdown from their 40-year high earlier this year. But a growing cadre of economists expect the Fed’s aggressive action to tip the United States into recession next year.

Such concerns have drawn lawmaker criticism, with Democratic senators Elizabeth Warren, Bernie Sanders, and Sheldon Whitehouse warning that rate hikes risk “slowing the economy to a crawl.”

Officials gave a clearer sign that they expect higher rates to impact the economy by revising their median projections:

• They cut their GDP growth forecasts, predicting an expansion of just 0.5 percent in 2023 and 1.6 percent in 2024.
• Still, they raised their estimate for inflation next year to 3.1 percent, while expecting inflation to fall to 2.5 percent in 2024.
• Officials also increased projections for the unemployment rate next year to 4.6 percent, from its 3.7 percent level in November.
• And 7 of 19 officials expect rates to move above 5.25 percent before the end of 2023.

Today’s rate move caps a challenging year for the U.S. central bank. The Fed was initially slow to begin tightening policy in response to surging price pressures, but it has moved aggressively to catch up since first lifting rates from near zero in March.

Fed officials continue to hope they can deliver a soft landing that avoids a dramatic surge in unemployment. They are seeking to slow growth to cool the labor market—with job openings still far above the number of unemployed Americans—and reduce pressure on prices that are running well above their 2 percent target.

Policymakers got some good news Tuesday, when government data showed consumer prices rose 7.1 percent in the year ending November, the lowest rate thus far in 2022. Even so, Powell has repeatedly said he’s willing for the economy to suffer some pain to lower inflation and avoid the mistakes of the 1970s, when the Fed prematurely loosened monetary policy. He repeated that message on Wednesday, adding that “we will stay the course until the job is done.”

—With assistance from Chris Middleton, Sophie Caronello, Liz Capo McCormick, Molly Smith, Jonnelle Marte, Matthew Boesler & Craig Torres.

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