Fed slows interest rate hikes to 0.25 points with more controlled inflation

The Federal Reserve (US central bank) raised its interest rate by 0.25 percentage points on Wednesday (1st), marking a return to slower increases after the aggressive monetary tightening promoted last year.

With inflation rising less than expected and economic activity starting to cool down, the Fomc (Fed’s open market committee) raised the reference rate to between 4.5% and 4.75%, the highest level since September 2007.

In its statement, the Fed said the FOMC expects “continued increases in the target range to be appropriate” to ensure the institution is tightening the economy enough to control inflation. This indicates that the bank is inclined to further increase borrowing costs after this meeting.

The Fed added that while inflation has “decelerated a little”, it still remains high.

The 25-point increase represents a break from the Fed’s unusual 0.5- and 0.75-point hikes in 2022 as it grapples with rising inflation.

On the other hand, the European Central Bank and the Bank of England are expected to raise rates by 0.5 points on Thursday (2).

“The Fed is further along in the tightening cycle and other central banks have more work to do. [para derrotar a inflação alta]” said Neil Shearing, chief economist at Capital Economics.

Despite a larger-than-expected drop in euro zone inflation in January, core inflation across the bloc remains high.

Fed officials said a slower tightening would give the bank more time to assess the impact of last year’s cumulative 4.25-point rise in interest rates, as well as provide greater flexibility to adjust course if necessary.

But the Fed has yet to signal that more rate hikes are needed, despite market skepticism about how many hikes the bank will carry out and when it will start cutting borrowing costs.

With wage growth remaining high and the number of US jobs rising again in December, Fed officials still don’t believe the job market has cooled enough to bring inflation down to the 2% target.

Demand for workers was unexpectedly high last month, with employers opening an additional 572,000 jobs on the last day of 2022. That brought the total number of jobs to 11 million, according to the Department of Labor.

That represents an increase from the 10.46 million openings recorded in November, beating economists’ forecast that openings would fall to 10.25 million, but still below the record set in March 2022.