Federal Reserve downshifts to 50 basis point hike, sees more rate increases ahead

As widely expected, the Federal Open Market Committee increased its policy rate by 50 basis points to 4.25%-4.50% on Wednesday, as it downshifted from the 75-bp hikes of its previous four meetings.

The central bank’s policymaking committee still sees more rate increases ahead “in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time,” it said in a statement.

The FOMC pointed out that inflation remains elevated and job gains have been robust in recent months. It repeated that it’s “highly attentive to inflation risks” and “strongly committed to returning inflation to its 2% objective.”

The Fed policymakers’ median projection now expect the federal funds target range to rise to 5.1% next year, compared with 4.6% in its September projection. In the minutes after the announcement, all three major U.S. stock indices sunk into the red, erasing gains from earlier in the session. The Nasdaq -0.6%, S&P 500 -0.5%, and the Dow -0.3%. The 10-year Treasury yield jumped 4 basis points to 3.55%.

“The Federal Reserve’s decision to reduce the pace of rate hikes to 50bps marks the beginning of the end of this rate hike cycle,” said SA contributor Ahan Vashi. “However, a reduction in pace of rate hikes is not a pivot, and the Fed’s quantitative tightening program is likely to continue for the foreseeable future. With the Fed tightening into a deeply inverted treasury yield curve, the near-term environment should be risk-off. Hence, equity markets could see increased volatility in upcoming weeks.”

On Tuesday, the November consumer price index rose less than economists expected, giving the Fed some comfort that inflation is heading in the right direction toward its 2% goal.

“The interest rate mantra for 2023 is ‘Higher for Longer’,” said Bankrate Chief Financial Analyst Greg McBride. “The hard work is still ahead. It has been easy – and necessary – for the Fed to raise interest rates aggressively in 2022, with interest rates starting from zero, unemployment below 4%, and inflation at a 40-year high. It gets a lot tougher to raise rates once the economy slows, unemployment rises, and inflation remains stubbornly high.”

Up next, Fed Chair Jerome Powell will answer questions at this 2:00 PM ET press conference.

SA contributor James Picerno looks at how long and how far the Fed will lift interest rates.