In its final meeting of the year, the Federal Reserve raised the interest rate by 0.5%. This increase is the seventh of the year and follows four consecutive aggressive rate hikes.
According to a statement from the Fed, the goal of the increase is "in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time."
Fed Chairman Jerome Powell assured that he doesn't "think anyone knows whether we’re going to have a recession or not" but that the focus is on "reducing inflation."
Fifty basis points is still a historically large increase, and we still have some ways to go. The most important question now is no longer the speed, but how high to raise rates ... Today, we have an assessment that we're not at a restrictive enough stance, even with today's move
Fifteen-year high
After two days of meetings, 2023 will begin with a rate in a range of 4.25% to 4.50%, the highest since 2007. The Fed has raised rates 3.75 percentage points over the course of the year in rapid fashion.
In November, total year-over-year inflation stood at 7.1%, down from 7.7% in October. Core inflation stood at 6% year-over-year, compared to 6.3% the month prior. Nevertheless, the Fed points to "solid job creation" and "modest growth in spending and production" as positive:
Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.
Rates will continue to rise in 2023
Fed officials expect benchmark interest rates to peak at 5.1-5.25% in 2023. This is 50 basis points higher than the 4.6% forecast last September.
Forecasts of when rates will be lowered are still distant. Some members of the Fed Committee expect rate cuts to come in 2024, dropping to 4-4.25%. For 2025, the rate is projected to be between 2.25% and 3.25%.
The Fed says that subsequent rate hikes or cuts will take into account a wide range of information, including "readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments."
GDP projections
The Fed's announcement was accompanied by new projections for Gross Domestic Product (GDP). The country's GDP is expected to rebound 1.95% for 2022, half a point higher than previously expected.
For 2023, the GDP forecast remains at 1.2% growth, slightly lower than this year's rate. A recovery is expected in 2024 with estimated growth of 1.6%, while in 2025 growth is projected at 1.8%.
On the other hand, the unemployment rate is expected to close the year at 3.7%, similar to November's figure and lower than the 3.8% which was projected in September.
