Fed hikes by 0.25% in further downshift on tightening, but sees more hikes ahead

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By Yasin Ebrahim 

Investing.com -- The Federal Reserve raised interest rates by 0.25% on Wednesday, and signaled a need to push monetary policy further into restrictive territory as the central bank looks to make up further ground in its battle against inflation.

The Federal Open Market Committee, the FOMC, raised its benchmark rate to a range of 4.5% to 4.75% from 4.25% to 4.5% previously. 

The quarter-point hike marked the second downshift from the Federal Reserve following a slowdown to 50 basis points at the December meeting after four-consecutive 75-basis-point hikes.

At the December meeting, the Fed lifted its benchmark rate to a median rate of 5.1% in 2023, equal to a range of 5.00% to 5.25%, suggesting three quarter-point hikes were in the chamber for 2023. The first rate hike of 2023 hasn't seen the Fed soften its stance to remain on course to move toward its projected target range. 

"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 Fed said in a statement.

But with monetary policy now at sufficiently restrictive levels and data continuing to show slowing inflation as well as weaker economic growth, many on Wall Street doubt whether there is a need for the Fed to go much further after this latest hike.

The core personal consumption expenditures price index, the Fed’s preferred gauge of inflation, slowed to 4.4% at a 12-month annualized rate in December from 4.7% previously.

“The market is saying we're good with it [a Fed pause]. I don't think anyone would look at the Fed and say, you didn't do what you said you were going to do,” Robert Conzo, CEO of The Wealth Alliance told Investing.com in an interview on Tuesday.  “The dramatic hikes that they did in 2022, was really unprecedented … they made their statement,” Conzo added.

Pointing to a labor market that remains red-hot that threatens to boost inflation, the Fed, however, is hesitant to hoist the white flag on rate hikes.

Powell acknowledged that disinflation has started in the goods sector, driven by easing in supply chain shortages, but cautioned against declaring victory too early amid price pressures in core services, ex-housing, sector of the economy, in which labor is the biggest cost. 

"We expect to see the disinflation process in the core services, ex- housing sector, but we don't see it yet," Fed Chairman Jerome Powell said at the press conference that followed the monetary policy statement. "The biggest part of it, research shows, is sensitive to slack in the economy. The labour market will probably be important," he added.

"We're not yet in at a sufficiently restrictive policy stance, which is why we say that we expect ongoing hikes will be appropriate," Powell said, though didn't push back as much as expected against the recent easing in financial conditions that have seen risk assets make a strong start to the year.  

"Our focus is not on short term moves, but on sustained changes to broader financial conditions," the Fed chief said.