Fed Raises Rates to 4.25%-4.5%, Highest Level in 15 Years

Summary:
• The U.S. Federal Reserve has raised interest rates by 50 basis points (0.5 percentage point) to 4.25%-4.5%, the highest level in 15 years.
• The decision signals a slowdown in the pace of hikes by the Fed, which for the past four consecutive meetings has raised rates in 75 basis point increments.
• The FOMC also released a new set of economic projections (SEP) and “dot plot,” representing top Fed officials’ projections for the next year.

The U.S. Federal Reserve has taken action to ensure the economy continues to grow at a sustainable rate. On Wednesday, the Fed raised interest rates by 50 basis points (0.5 percentage point) to 4.25%-4.5%, the highest level in 15 years. This decision signals a slowdown in the pace of hikes by the Fed, which for the past four consecutive meetings has raised rates in 75 basis point increments.

The rate hike comes at a time when the economy is showing signs of slowing down due to increasing borrowing costs. Inflation as measured by the consumer price index (CPI) continues to slow on a yearly basis: November’s CPI report showed that inflation rose 7.1%, down from 7.7% in October, the Labor Department reported Tuesday.

Fed Chair Jerome Powell has signaled that the terminal rate – the peak rate for the current hiking cycle, expected sometime next year – will likely be over 5%. Officials with the U.S. central bank had said over the past month that it might be appropriate to slow the pace of interest rate hikes while the economy adjusts to the higher level of borrowing costs. However, “ongoing increases in the target range will be appropriate,” according to the FOMC statement.

The FOMC also released a new set of economic projections (SEP) and “dot plot,” representing top Fed officials’ projections for the next year. Ten out of 19 central bankers who are part of the committee expect the terminal rate to be higher than 5% but lower than 5.25% by the end of 2023, the dot plot shows. For 2024, the majority of dots indicate that the terminal rate will be over 5.5%.

The Fed’s move to raise interest rates comes at a time of economic uncertainty, with the U.S.-China trade war and the ongoing government shutdown creating headwinds for the economy. In addition, the recent volatility in global markets has raised concerns about the global economic outlook.

The Fed’s rate hike is expected to have a ripple effect on the economy, with higher borrowing costs likely to slow consumer spending and investment. As a result, the Fed’s actions may have a dampening effect on growth in the near term. In the long term, however, the Fed’s actions are designed to ensure the economy continues to grow at a sustainable rate.