Federal Reserve officials are eying another rate hike when they convene next week. But there are signals the next hike could be smaller than those in the past year.
The Federal Reserve Board of Governors will meet Jan. 31 to Feb. 1. It will be their first meeting of 2023.
In an effort to control record inflation, the Fed raised its target rate 425 basis points in 2022. Following a series of 75-point hikes, an increase of 50 points was approved in December, putting the target rate at a 15-year high at 4.25 to 4.5 percent.
With signs of overall inflation cooling, falling from a high of 9 percent in June to 6.5 percent in December, one board members in a speech last week said he would favor a smaller rate hike, while also pushing toward the 2 percent inflation goal.
To return to the airplane image, after climbing steeply and using monetary policy to significantly raise interest rates throughout the economy, it was apparent to me that it was time to slow, but not halt, the rate of ascent.Christopher Waller, Federal Reserve Governer
“When the FOMC began raising the federal funds rate last spring from near zero, it made sense to move quickly,” said Governor Christopher Waller at the C. Peter McColough Series on International Economics, Council on Foreign Relations in New York. “But after front-loading monetary policy tightening, with many unprecedented 75 basis point hikes in the federal funds rate target, by early December I believed the policy stance was slightly restrictive, and I supported a decision by the Committee to hike by a still considerable 50 basis points. To return to the airplane image, after climbing steeply and using monetary policy to significantly raise interest rates throughout the economy, it was apparent to me that it was time to slow, but not halt, the rate of ascent.
“And in keeping with this logic and based on the data in hand at this moment, there appears to be little turbulence ahead, so I currently favor a 25-basis point increase at the FOMC’s next meeting at the end of this month. Beyond that, we still have a considerable way to go toward our 2 percent inflation goal, and I expect to support continued tightening of monetary policy.”
Dallas Fed President Lorie Logan in an address at the University of Texas at Austin’s McCombs called for slowing the pace of hikes.
“Now, if you’re on a road trip and you encounter foggy weather or a dangerous highway, it’s a good idea to slow down,” Logan said. “Likewise if you’re a policymaker in today’s complex economic and financial environment. That’s why I supported the FOMC’s decision last month to reduce the pace of rate increases. And the same considerations suggest slowing the pace further at the upcoming meeting.
“A slower pace is just a way to ensure we make the best possible decisions.”
In December, U.S. Federal Reserve Chair Jerome Powell suggested the committee expects rates to continue to increase in 2023 and elevated rates will be held longer to meet its goal of bringing down inflation in a sustained way.
“We will have to hold the restrictive level for longer. The 12-month core inflation is at 6 percent, three times the level we want,” Powell explained. “We have a long ways to go for price stability.”