The Fed: Fed inches interest rates up another quarter percentage point

Stocks
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SPX,
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extended their losses after the Fed statement. The yield on the 10-year Treasury note
TMUBMUSD10Y,
3.403%
was down slightly to 3.47%.

Some economists suggested the bank’s might hint it was getting closer to the end of a rate-hike cycle that began last spring. Instead, the bank largely stuck to its prior script.

“The [Federal Open Market Committee] anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time,” the statement read.

Yet the bank did alter some parts of its statement to indicate it would raise rates in smaller increments. The Fed referred to the “extent” of future increases instead of the “pace,” a hint that it’s not far from its goal.

“The FOMC has moved past stage one, debating how fast to raise rates, to stage two, debating how far to raise rates,” said chief economist Chris Low of FHN Financial. “Stage three will be debating how long to keep rates at their peak.”

In December, the bank’s interest-rate setting panel forecast that its’ benchmark rate would top out around 5% to 5.25%. That suggests at least two more rate hikes of a quarter point.

Before Wednesday’s hike, Wall Street was not entirely convinced the Fed would keep raising rates. Many investors believed the Fed would stop soon and even begin to cut rates later in the year.

They point to a slowing economy and waning inflation to support the case for the Fed easing up on the monetary brakes. If the Fed keeps going, they contend, the U.S. could slump into recession.

To be sure, the economy has softened. Hiring has slowed for five straight months and hiring in January may have been the weakest in two years. A variety of other indicators also point to spreading weakness.

The annual rate of inflation, meanwhile, has slowed to 6.5% as of December from a four-decade peak of 9.1% last summer, based on the consumer price index.

Although inflation is expected to continue to slow, prices are still rising more than triple the annual average in the decade proceeding the pandemic. The Fed is trying to restore inflation to pre-crisis levels of 2% or so.

The biggest worry of the Fed is a surge in wages that threatens to prolong the bout of high inflation. If worker pay keeps rising rapidly, companies are likely to keep raise prices — what is known as a wage-price spiral.

Fresh reports on labor costs show wage growth is slowing as a historically tight labor market loosens up, but businesses are still grappling with a shortage of workers.

The rate of employee compensation grew 5% in the 12 months ended in December, almost double the pre-pandemic average.