Federal Reserve Slows Its Fight Against Inflation

The Federal Reserve relieved some of the pressure it has put on the economy with a smaller rate hike Wednesday, but policymakers still aren’t completely relenting in their fight against inflation.

The Fed raised rates by 50 basis points in their December meeting, putting the target range at 4.25% to 4.50%.¹ The past four rate hikes have been 75 basis points in an effort to tamp down ballooning inflation, but reports this month showed the job market starting to sputter and inflation slowing more than expected.

The Fed raised interest rates by 0.50% in their December meeting for a range of 4.25% to 4.50%.
This is the first time in six months that the rate hikes have been less than 0.75%.
The tide may be turning on inflation, according to November reports, but the Fed will have to be careful to not raise unemployment in the coming months.

The unemployment rate was unchanged in November, but there are fewer jobs available than there have been in recent months.³⁴ A difference between the unemployment rate reported by workers and the rate reported by companies has led some economists to believe that job losses could be higher in the coming months.⁵

So far, the labor market has remained resilient against multiple jumbo hikes but some economists are concerned that continued upward pressure on interest rates will trigger more widespread job losses.

And while the impact of the rate hikes is becoming apparent in the labor market, it seems that continued rate hikes are finally starting to be effective against inflation. Prices in November were 7.1% higher than they were this time last year, according to this week’s Consumer Price Index report.⁶ That’s down from October and lower than many economists had predicted.

This hike and the ones that follow through the first quarter of 2023 will be crucial in determining whether the U.S. economy will fall into a recession and how bad it could be. Opponents of further rate hikes feel that job losses would outweigh the benefits if the Fed continues to be hawkish on inflation. Others, including many policymakers on the Fed’s board, feel that further rate hikes are needed to fully control inflation.