The Federal Reserve raised its target fed funds rate by 0.5% on Wednesday to a new range of between 4.25% and 4.5%.
The Fed said it will continue with its previously announced plan to let Treasury securities and agency debt and agency mortgage-backed securities roll off its balance sheet on a monthly basis.
“Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures,” the Fed said in a statement.
The Fed reassured investors that job gains have been strong and the unemployment rate has declined, but noted spending and production rates have softened. The 0.5% rate hike marks a step down in Fed tightening following four consecutive 0.75% rate hikes.
The statement comes after the Labor Department reported the U.S. economy added 263,000 jobs in November, beating economist estimates of 200,000 jobs. The unemployment rate stands at 3.7%, and hourly wages were up 5.1% from a year ago.
All 12 Fed members voted unanimously for the 0.5% hike.
The Consumer Price Index (CPI) was up 7.1% in November, down from a 2022 peak of 9.1% in June. The bond market currently projects a 71% chance the Fed funds rate will rise at least another 0.5% by March 2023.
The SPDR S&P 500 ETF Trust SPY rose by 0.5% on Wednesday following the announcement before trading negative.
Economic Projections: The Federal Reserve also released new “dot plot” economic forecasts on Wednesday. FOMC members are now projecting a 2023 terminal interest rate of 5.1%, up from 4.6% in September. FOMC members do not see a pivot from rate hikes to rate cuts until 2024.
Federal Reserve members are projecting a 2023 U.S. unemployment rate of 4.6%, up from 4.4% in September. The committee’s 2023 GDP growth projection dropped from 1.2% to 0.5% and its 2024 GDP growth projection dropped from 1.7% to 1.6%. The Fed is now projecting 2023 PCE inflation of 3.1%, up from previous estimates of 2.8%.
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