The Federal Reserve on Wednesday dialed back the pace of its fight against inflation as officials seek a delicate balance between keeping prices low and avoiding a deep recession.
The Federal Open Market Committee raised its benchmark interest rate by half a percentage point after a two-day meeting.
The increase lifted the target range for the federal funds rate to 4.25% to 4.50% – the highest level since December 2007.
The half-point increase marked a slowdown for the Fed, which had made three quarter-point rate hikes in four consecutive policy meetings through November.
However, the latest hike marks only the fifth time in the past 22 years that the Fed has raised rates by more than a quarter of a percentage point. All five cases occurred this year.
A smaller increase could ease concerns among business leaders and investors who fear the Fed’s continued interest rate hikes will plunge the economy into a sharp recession. Uncertainty over the Fed’s policy path has fueled stock market volatility for months.
Smaller increases were common among investors. Prior to the Fed’s announcement, the market was pricing in an 82% chance of a half-point hike and only an 18% chance.
The Fed’s decision came a day after the latest consumer price index showed prices rose 7.1% in November — the slowest pace of the year. On a monthly basis, inflation increased by just 0.1 percent from October to November.
In a speech at the end of November, Fed Chairman Jerome Powell said the central bank could slow the pace of its policy tightening actions until December. He also acknowledged that the Fed will need to raise rates higher than officials expect to bring inflation back to its 2% target.
The market currently expects the benchmark rate to peak just below 5% in March.
The Fed’s policy actions affect almost every element of the broader economy, affecting credit card interest rates, auto loans, savings accounts, and more. They also had an indirect but significant impact on mortgage rates, which have more than doubled this year.
The rapid pace of increases this year has cooled quickly in the US housing market. Home sales are up, and experts are warning that prices could fall 20% from their recent peaks.
Billionaire Elon Musk and JPMorgan Chase boss Jamie Dimon were among those who spoke about potential recessionary risks associated with rising interest rates.
Last week, Musk warned of an economic recession.becomes much stronger” if policymakers move forward with another rate hike.
Treasury Secretary Janet Yellen, who has long downplayed the possibility of a recession, acknowledged last Sunday that she sees a “risk” of a recession in the coming months.
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