U.S. announces 7th interest rate hike of 2022

The U.S. Federal Reserve reinforced its inflation fight Wednesday by raising its key interest rate for the seventh time this year and signalling 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 centto 4.5 per cent, its highest level in 15 years. Though lower 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 five per centto 5.25 per centby the end of 2023. That suggests that 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 the Fed would project only an additional half-point increase.

The 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 centin June.

"The inflation data in October and November show a welcome reduction," chair Jerome Powell said at a news conference. "But it will take substantially more evidence to give confidence that inflation is on a sustained downward path."

U.S. economy expected to barely grow next year

In its updated forecasts, the Fed's policymakers predicted slower growth and higher unemployment for next year and 2024. The unemployment rate is envisioned to jump to 4.6 per centby the end of 2023, from 3.7 per centtoday. That would mark a significant increase in joblessness that typically would reflect a recession.

Consistent with a sharp slowdown, the officials also projected that the economy will barely grow next year, expanding just 0.5 per cent, less than half the forecast it had made in September.

In recent weeks, 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 two per centannual target. The national average for a gallon (about 3.8 litres)of regular gas, for example, has tumbled from $5 US in June to $3.21.

Many supply chains are no longer clogged, thereby helping reduce goods prices. The better-than-expected November inflation data showed that the prices of used cars, furniture and toys all declined last month.

So did the costs of services from hotels to airfares to car rentals. Rental and home prices are falling, too, though those declines have yet to feed into the government's data.

And one measure the Fed tracks closely "core" prices, which exclude volatile food and energy costs for a clearer snapshot of underlying inflation rose only slightly for a second straight month.

Inflation has also eased slightly in Europe and the United Kingdom, leading analysts to expect the European Central Bank and the Bank of England to slow their pace of rate hikes at their meetings Thursday. Both are expected to raise rates by half a point to target still painfully high prices spikes after big three-quarter-point increases.

Inflation in the 19 countries using the euro currency fell to 10 per centfrom 10.6 per centin October, the first decline since June 2021. The rate is so far above the bank's two per centgoal that rate hikes are expected to continue into next year. Britain's inflation also eased from a 41-year record of 11.1 per centin October to a still-high 10.7 per centin November.

At the Fed, Powell has made clear that the central bank isn't close to declaring victory over high inflation. Fed officials will likely want to see further moderate inflation readings before they would be comfortable suspending their rate hikes.

WATCH | How to weather the storm of interest rate hikes:

Interest rate hike: how to weather the storm

2 years ago

Duration 6:02

Personal finance educator Kelley Keehn gives tips on how Canadians can brace for upcoming economic changes as Canada's central bank raises its interest rates.

One reason for caution is that inflation gauges can sometimes reignite after initially slowing. In 2021, for example, core price increases slowed for a couple of months in the summer before accelerating again and reaching new heights.

Cumulatively, the Fed's hikes have led to much costlier borrowing rates for consumers as well as companies, ranging from mortgages to auto and business loans. The hikes have sent home sales plummeting and are starting to reduce rents on new apartments, a leading source of high inflation.

The officials have said they want rates to reach "restrictive" levels that slow growth and hiring and bring inflation down to their annual target of two per cent. 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.