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Fed raises interest rates half a point to highest level in 15 years

The Federal Reserve on Wednesday raised its benchmark interest rate to the highest level in 15 years, indicating the fight against inflation is not over despite some promising signs lately.

Keeping with expectations, the rate-setting Federal Open Market Committee voted to boost the overnight borrowing rate half a percentage point, taking it to a targeted range between 4.25% and 4.5%. The increase broke a string of four straight three-quarter point hikes, the most aggressive policy moves since the early 1980s.

Along with the increase came an indication that officials expect to keep rates higher through next year, with no reductions until 2024. The  or point where officials expect to end the rate hikes, was put at 5.1%, according to the FOMC’s “dot plot” of individual members’ expectations.

Investors initially reacted negatively to the expectation that rates may stay higher for longer, and  During Chairman said it was important to keep up the fight against inflation so that the expectation of higher prices does not become entrenched.

“Inflation data received so far for October and November show a welcome reduction in the monthly pace of price increases,” the chair said at his post-meeting news conference. “But it will take substantially more evidence to have confidence that inflation is on a sustained downward” path.

The new level marks the highest the fed funds rate has been since December 2007, just ahead of the global financial crisis and as the Fed was loosening policy aggressively to combat what would turn into the worst economic downturn since the Great Depression.

This time around, the Fed is raising rates into what is expected to be a moribund economy in 2023.

Members penciled in increases for the funds rate until it hits a median level of 5.1% next year, equivalent to a target range of 5%-5.25. At that point, officials are likely to pause to allow the impact of monetary policy tightening to make its way through the economy.

The consensus then pointed to a full percentage point worth of rate cuts in 2024, taking the funds rate to 4.1% by the end of that year. That is followed by another percentage point of cuts in 2025 to a rate of 3.1%, before the benchmark settles into a longer-run neutral level of 2.5%.

However, there was a fairly wide dispersion in the outlook for future years, indicating that members are uncertain about what is ahead for an economy dealing with,

The newest dot plot featured multiple members seeing rates heading considerably higher than the median point for 2023 and 2024. For 2023, seven of the 19 committee members – voters and nonvoters included – saw rates rising above 5.25%. Similarly, there were seven members who saw rates higher than the median 4.1% in 2024.

approved unanimously, was virtually unchanged from November’s meeting. Some observers had expected the Fed to alter language that it sees “ongoing increases” ahead to something less committal, but that phrase remained in the statement.

Fed officials believe raising rates helps take money out the economy, reducing demand and ultimately pulling prices lower after inflation spiked to its highest level in more than 40 years.

The FOMC lowered its growth targets for 2023, putting expected GDP gains at just 0.5%, barely above what would be considered a recession. The GDP outlook for this year also was put at 0.5%. In the September projections, the committee expected 0.2% growth this year and 1.2% next.

The committee also raised its median estimate for its favored core inflation measure to 4.8% for 2022, up 0.3 percentage point from the September outlook. Members slightly lowered their unemployment rate outlook for this year and bumped it a bit higher for the ensuing years.

The rate hike follows consecutive reports showing progress in the inflation fight

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