The Fed moderates rate hikes, but will maintain its upward course to combat inflation

the federal reserve (Fed, central bank) increased its reference rate by half a percentage point on Wednesday as expected by the market, but reaffirmed that it will continue to raise interest rates and will take them above 5%.

At the end of a two-day meeting of his Monetary Committeethe US central bank, which brought its rates to 4.25-4.50% by unanimous decision, raised its inflation forecast for 2023 to 3.1% against 2.8% of its previous projection.

Also lowered its GDP growth forecast for the largest world power next year, 0.5% compared to 1.2%, according to the statement issued at the end of the meeting.

Rate increases aim to make credit for consumption and investment more expensiveand thus cool the economy and reduce pressure on prices, in a context of persistent inflation in the United States.

These are the highest reference rates since 2007.

new increments "will be appropriate"the agency specified in its statement.

While in September the institution forecast a level of 4.6% for the reference rate at the end of the upward cycle, now it is handling levels above 5%.

– Less optimistic about inflation –

This moderation in interest rate increases marks the beginning of a new stage in the fight against the scourge of inflationa Fed priority that aims to bring it to a level of 2% per year, considered healthy for the economy.

The agency had been raising its rates by 0.75 percentage points in the last four monetary policy meetings, an increase of a magnitude unprecedented since 1994.

Despite this moderation, the central bank is less optimistic than in September about the path of inflation.

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Even, for 2022, it expects a closing at 5.6% compared to 5.4% three months ago.

"Much more evidence will be needed to be confident that inflation is on a sustainable downward path."Fed Chairman Jerome Powell told reporters shortly after the meeting ended.

The Fed does not mention in its statement the possibility of a recession next year. 

The market fears this scenario, in a context of a sharp rise in rates that could slow down economic activity too much. But Powell reiterated Wednesday that the country will not necessarily enter a recession.

The central bank expects an unemployment rate of 4.6% in 2023 and 2024 compared to 3.7% currently.

12-month inflation marked 7.1% in November, well below the 7.7% in October, according to the consumer price index (CPI) published last Tuesday before the start of the meeting of the fed.

The effects of the rate policy take months to be seen. Consumption remains sustained and the labor market is in very good health in the United States.

-Market reaction

Following the Fed’s decision and Powell’s comments, the New York stock market closed lower this Wednesday.

The Dow Jones index fell 0.42% to 33,966.35 points, the technological Nasdaq fell 0.76% to 11,170.89 units and the S&P 500 lost 0.61% to remain below the level of 4,000 points, at 3,995.32.

"The forecasts are more severe than we expected"acknowledged Ian Shepherdson of Pantheon Macroeconomics.

Some technology companies, very sensitive to rate fluctuations due to their dependence on credit, suffered. Apple lost 1.55% and Google (Alphabet) 0.56%.

Tesla fell again, 2.58% to $156.80, and is at its lowest level since November 2020.

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