US Fed raises cash rate by half a point and signals more to come

US Federal Reserve chairman Jerome Powell has raised its key interest rate for the seventh time in a row. Photo / AP

The United States Federal Reserve has reinforced its inflation fight by raising its key interest rate for the seventh time this year and signaling more hikes to come.

But the Fed announced a smaller hike than it had in its past four meetings at a time when inflation is showing signs of easing.

The Fed boosted its benchmark rate a half-point to a range of 4.25 per cent to 4.5 per cent, its highest level in 15 years.

Though smaller than its previous three-quarter-point hikes, the latest move will further heighten the costs of many consumer and business loans and the risk of a recession.

The policymakers also forecast that their key short-term rate will reach a range of 5 per cent to 5.25 per cent by the end of 2023.

That suggests the Fed is prepared to raise its benchmark rate by an additional three-quarters of a point and leave it there until the end of next year. Some economists had expected that they would project only an additional half-point increase.

The central bank’s latest rate hike was announced one day after an encouraging report showed that inflation in the United States slowed in November for a fifth straight month. The year-over-year increase of 7.1 per cent, though still high, was sharply below a recent peak of 9.1 per cent in June.

Fed officials have indicated that they see some evidence of progress in their drive to defeat the worst inflation bout in four decades and to bring inflation back down to their 2 per cent annual target. The national average for a gallon of regular gas, for example, has tumbled from US$5 in June to US$3.21.

The government report which came out on Tuesday showed signs that inflation is finally easing from chronically high levels. Gas prices fell, the cost of used cars, furniture and toys declined, and the costs of services from hotels to airfares to car rentals dropped.

Rate hikes have already led to much costlier borrowing rates for consumers as well as companies, ranging from mortgages to auto and business loans. Worries have grown that the Fed is raising rates so much in its drive to curb inflation that it will trigger a recession next year.

Yet with price increases still uncomfortably high Fed chair Jerome Powell and other Fed officials have underscored that they expect to keep rates at their peak for an extended period.

With inflation pressures now easing, though, most economists think the Fed will further slow its hikes and raise its key rate by just a quarter-point at its next meeting early next year.

“The data (Tuesday) kind of fits with our idea that the Fed will downshift further in February,” said Matthew Luzzetti, an economist at Deutsche Bank and a former research analyst at the Fed. “Downshifting helps to maximize their prospects of a soft landing,” in which the Fed’s rate hikes would slow growth and tame inflation but not tip the economy into a recession.