The Federal Reserve recently raised interest rates by 0.25%, and plans to do so again next month to control inflation. This is the 6th consecutive interest rate hike in the past year, bringing the benchmark federal-funds rate from near zero to a range between 4.5% and 4.75%. The central bank has not changed its guidance for future interest rate increases and aims to maintain a restrictive monetary policy stance.
In December, most Fed officials projected raising the fed-funds rate to a range between 5% and 5.25% this year, which would result in additional quarter-point increases in March and May, followed by a pause. Despite strong wage pressures, a tight labor market, and high service-sector inflation, Fed officials will base their decisions on future economic performance. Fed Chair Jerome Powell stated that the disinflationary process has started but the job is not fully done. The Fed aims to balance the risk of raising rates too much and causing economic harm, and the risk of not doing enough to bring down inflation.
The fed-funds rate impacts other borrowing costs such as mortgage rates, credit card rates, and auto loans. The Fed is raising rates to slow economic growth and control inflation. However, officials have been cautious in recent weeks about providing guidance that may spark market rallies, which could undermine their efforts to fight inflation.
Markets have rallied recently because investors expect the Fed to slow its rate increases, reducing interest rate volatility and easing financial conditions. The recent decline in inflation could reflect easing supply-chain bottlenecks, which may not be enough to bring inflation down to the Fed's 2% goal. Fed officials and economists are concerned that labor markets still look tight and that the market's view may be based more on hope. The amount and length of future interest rate hikes will depend on how much past increases will slow the economy and how much wage and price pressures will slow without significant weakness in the job market.
Inflation fell to 4.4% in December from 5.2% in September, and moderated to an annualized 2.9% rate in the October-to-December period. The Fed stated that inflation has eased somewhat but remains elevated.
In conclusion, the Federal Reserve is raising interest rates to control inflation and maintain a restrictive monetary policy stance. The amount and length of future interest rate hikes will depend on future economic performance and the balancing of risks. Inflation has moderated, but remains elevated, and labor markets still look tight.
For individuals, this means that it is important to keep an eye on their investments, especially those in an IRA or 401(k), during a recession. It is important to have a diverse portfolio, regularly review and rebalance it, and seek advice or get your questions answered. Please contact P.R. Curtman today for a free portfolio review..