US Federal Reserve increases benchmark rate by a quarter of percentage point

‘Ongoing increases’ will be needed to bring price pressures under control

The US Federal Reserve increased its benchmark rate by a quarter of a percentage point on Wednesday but warned that “ongoing increases” would be needed to bring inflation under control.

The shift down to a quarter-point increase marked a return to a slower, more orthodox pace of rate rises after the Fed rapidly ratcheted up borrowing costs last year, and reflected the fact that inflation appears to have peaked while the economy is starting to slow.

However, in a statement, the Fed said that “ongoing increases in the target range will be appropriate” to ensure it is restraining the activity enough to bring price pressures under control. That indicated the central bank is inclined to raise borrowing costs further at its next meeting.

The latest increase by the Federal Open Market Committee brings the federal funds rate to 4.5-4.75 per cent, the highest level since September 2007. The Fed said that while inflation has “eased somewhat”, it still remains “elevated”.


The quarter-point increase represents a break with the unusually large half and three-quarter-point rate rises the Fed relied on in 2022 as it wrestled with soaring inflation. By contrast, the European Central Bank and the Bank of England are expected to increase rates by 0.5 points on Thursday.

“The Fed is further into the tightening cycle and other central banks have more work to do [to defeat high inflation],” said Neil Shearing, chief economist of Capital Economics.

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Despite a larger than expected fall in euro zone inflation in January, core inflation in the bloc remains high.

Trading in US stocks was choppy following the statement, leaving the benchmark S&P 500 and the tech-heavy Nasdaq Composite slightly lower on the day. There was a modest sell-off in Treasury bonds.

Fed officials have said slower tightening will give them more time to assess the impact of last year’s cumulative increase of 4.25 points in the benchmark federal funds rate, as well as greater flexibility to adjust course if necessary.

But the Fed is still expected to signal that more rate rises are needed, despite market scepticism over how many increases it will carry out and when it will start to cut borrowing costs.

With wage growth remaining high and the number of US job vacancies jumping again in December, Fed officials do not yet think the labour market has cooled sufficiently to bring inflation down to the central bank’s 2 per cent target, which the Fed reaffirmed on Wednesday.

Demand for workers was unexpectedly high last month, with employers posting an additional 572,000 job openings on the last day of 2022. That brought the total number of vacancies to 11 million, according to the labour department’s Job Openings and Labor Turnover Survey released on Wednesday.

That is up from 10.46 million openings reported in November, above economists’ forecast that openings would decline to 10.25 million, but still below the record high set in March 2022.

In December most officials projected the fed funds rate would peak at 5-5.25 per cent this year and for that level to be maintained throughout 2023.

Fed officials have stuck to that thinking in recent weeks. If the path they set out in December still holds, it suggests the central bank will implement two more quarter-point rate rises beyond Wednesday’s increase.

But policymakers have been unable to convince money managers and traders in fed funds futures markets. Financial markets continue to assume that rates will peak short of 5 per cent and that the Fed will subsequently cut them by half a percentage point before the end of the year.

That has set the stage for what Tobias Adrian, the IMF’s head of monetary and capital markets, warned could be a shock if the inflation data disappoints and the Fed tightens further as a result. – Copyright The Financial Times Limited 2023