Fed Downsizes Latest Rate Hike, Remains Hawkish on 2023

The central bank raised its key rate by half a percentage point

Jerome Powell standing at a podium at a press conference

Alex Wong / Getty Images

The U.S. Federal Reserve slowed the pace of its interest rate hikes as expected Wednesday, raising the federal funds rate by 50 basis points (bps) to a range of 4.25% to 4.5% while signaling more increases are on tap in 2023 as the central bank battles high inflation.

Key Takeaways

  • The Federal Reserve raised its minimum interest rate by 50 basis points to a range of 4.25% to 4.5%, in line with market expectations.
  • Policymakers' individual forecasts for 2023 struck a hawkish tone, projecting a fed funds rate above 5% by the end of next year.
  • The U.S. economy is expected to grow just 0.5% in 2023 as unemployment rises to 4.6% from the recent 3.7%, based on Fed forecasts.
  • Stocks fell while Treasury bonds were little changed following the Fed rate announcement.

The benchmark interest rate affecting borrowing costs across the U.S. economy and around the world is likely to rise another 75 bps next year, topping 5% despite a virtual stall in economic growth, based on the individual projections of the 19 members of the Fed's rate-setting Federal Open Market Committee (FOMC), released alongside the rate decision.

The median forecast sees U.S. Gross Domestic Product (GDP) growing just 0.5% in 2023 following a similarly subdued gain this year. Unemployment is expected to increase to 4.6% by the fourth quarter of next year, from 3.7% last month.

The projections were modestly more hawkish than market expectations. The S&P 500 index, up earlier in the day, declined by as much as 1% following the FOMC release before recovering somewhat. Treasurys were little changed, holding the bulk of the relief gains from the past two months after a bear market triggered by rapid Fed rate hikes as inflation soared to 40-year highs.

The FOMC statement was a near-copy of the last one, issued on Nov. 2. It didn't mention a slowdown in inflation since it was based on the last two Consumer Price Index (CPI) releases. Federal Reserve Chair Jerome Powell alluded to the slowdown in remarks before a press conference, but cautioned it may not persist.

"The inflation data received so far for October and November show a welcome reduction in the monthly pace of price increases. But it will take substantially more evidence to give confidence that inflation is on a sustained downward path," Powell said. 

CPI rose 0.1% in November after a 0.4% increase in October, but was still up 7.1% year-over-year as of last month.

"In light of the cumulative tightening of monetary policy and the lags in which it affects economic activity and inflation, the committee decided to raise the interest rates by 50 basis points today, a step down from the 75 basis point pace seen over the previous four meetings," Powell said. "Of course 50 basis points is still a historically large increase and we still have some ways to go."

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  1. Board of Governors of the Federal Reserve System. "FOMC Statement."

  2. Board of Governors of the Federal Reserve System. "Summary of Economic Projections."

  3. U.S. Bureau of Labor Statistics. "Consumer Price Index - November 2022."