2/28/24, 11:43 AM Fed Slows Its Tightening With Quarter-Point Interest Rate Rise - WSJ

YOU HAVE BEEN WSJ wants to hear from you. Take part in this short survey to help shape The Journal.
SELECTED Survey

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For
non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.

https://www.wsj.com/articles/fed-approves-quarter-point-rate-hike-signals-more-increases-likely-11675278190

ECONOMY U.S. ECONOMY

Fed Slows Its Tightening With Quarter-

Point Interest Rate Rise
Central bank acknowledges reduced inflation but signals plans to
increase interest rates again in March

By Nick Timiraos Follow

Updated Feb. 1, 2023 6:39 pm ET

WASHINGTON—The Federal Reserve nudged up short-term interest rates by a

quarter-percentage point and signaled it was on track to do so again at its
meeting next month while officials consider whether and when to pause
increases late this spring.

The decision Wednesday to raise the Fed’s benchmark federal-funds rate

followed six larger, consecutive increases to combat inflation, which hit a 40-
year high last year. Officials raised rates by a half point in December and by 0.75
point in November.

Officials agreed to slow rate rises to gain more time to study the effects of their
moves. “We’re talking about a couple of more rate hikes to get to that level we
think is appropriately restrictive,” Fed Chair Jerome Powell said at a news
conference after the central bank’s policy meeting.

Despite signs that wage and price growth might have peaked several months
ago, “We’re going to be cautious about declaring victory and sending signals
that we think that the game is won,” he said.

Investors welcomed the decision, with the S&P 500 closing up about 1%, to
4119.21, while the Nasdaq Composite advanced by 2% to 11816.32. The Dow Jones
Industrial Average rose 6.92 points to 34092.96. The yield on the benchmark 10-

https://www.wsj.com/articles/fed-approves-quarter-point-rate-hike-signals-more-increases-likely-11675278190 1/6
2/28/24, 11:43 AM Fed Slows Its Tightening With Quarter-Point Interest Rate Rise - WSJ

year U.S. Treasury note declined to 3.398% from 3.527% the previous day. Yields
fall when prices rise.

Federal-funds rate target

February: +0.25 pct. pt.

7% RECESSION

0
2000 '05 '10 '15 '20

Note: Chart shows midpoint of range since 2008.

Source: Federal Reserve

The latest increase caps a year in which the Fed lifted the fed-funds rate from
near zero to a range between 4.5% and 4.75%, a level last reached in 2007,
extending the central bank’s most rapid interval of rate increases since the early
1980s.

Mr. Powell and Fed officials tried not to feed speculation regarding a rate pause.
For example, they left unchanged the guidance in their postmeeting policy
statement that has said since last March that they anticipate “ongoing
increases” in interest rates “will be appropriate.”

But government-bond investors thought they smelled a coming pause anyway,

analysts said, because they expect the cumulative effect of last year’s rate
increases to slow the economy sharply this year.

https://www.wsj.com/articles/fed-approves-quarter-point-rate-hike-signals-more-increases-likely-11675278190 2/6
2/28/24, 11:43 AM Fed Slows Its Tightening With Quarter-Point Interest Rate Rise - WSJ

“Markets rallied fiercely despite the hawkish message because investors know
the Fed isn’t omniscient nor is it dogmatic,” said Daleep Singh, a former senior
Fed official who is now chief global economist at PGIM Fixed Income. “Economic
conditions are in charge when the Fed is in data-dependent mode.”

Since Fed officials met in December, economic activity has been mixed. Hiring
has held steady, pushing the unemployment rate down to 3.5% in December, a
half-century low.

But consumer spending has moderated, and manufacturing activity has

declined, an indication of weakness extending beyond the hard-hit housing
sector. “Markets have essentially ignored the Fed meeting and are reacting to
those data,” said Mr. Singh.

The fed-funds rate influences other borrowing costs throughout the economy,
including rates on mortgages, credit cards and auto loans. The Fed is raising
rates to cool inflation by slowing economic growth. It believes those policy
moves work through financial markets by tightening financial conditions, such
as by raising borrowing costs or lowering prices of stocks and other assets.

In recent weeks, markets have rallied partly because investors anticipated that
the Fed would slow its rate increases this week and remove uncertainty
regarding the rate outlook, which reduces interest-rate volatility. Lower
volatility can ease financial conditions. Investors also think a sharp slowdown
will lead the Fed to cut rates by year’s end.

https://www.wsj.com/articles/fed-approves-quarter-point-rate-hike-signals-more-increases-likely-11675278190 3/6
2/28/24, 11:43 AM Fed Slows Its Tightening With Quarter-Point Interest Rate Rise - WSJ

Fed Chairman Jerome Powell says he expects interest rates to say higher for longer. PHOTO: SAUL
LOEB/AGENCE FRANCE-PRESSE/GETTY IMAGES

In December, most Fed officials penciled in raising the fed-funds rate to a range
between 5% and 5.25% this year, with none projecting cuts. After the hike that
they approved Wednesday, that projection would imply additional quarter-point
increases at the Fed’s meetings in March and May, followed by a pause in rate
rises.

Mr. Powell indicated Wednesday they would base their decisions and any
revision to those projections on fresh reports of hiring, inflation and growth
before their next meeting, March 21-22.

“Certainty is just not appropriate here,” said Mr. Powell. “I’m not going to try to
persuade people to have a different forecast, but our forecast is that it will take
some time and some patience, and that we’ll need to keep rates higher for
longer.”

Mr. Powell and other economists are concerned that the recent decline in
inflation could reflect the long-anticipated easing of supply-chain bottlenecks—
and that might not be enough to bring inflation down to the Fed’s 2% goal.

“I’m somewhat worried that the market view is based more on hope,” said Karen
Dynan, an economist at Harvard University who served in the Obama
administration. “Labor markets still look really tight.”

Mr. Powell repeated his earlier view that a tight labor market would keep
upward pressure on wages and prices even though they have moderated
recently. He also cited reasons the economy might prove resilient, including
from an increase in public spending on construction projects and an increase in
inflation-adjusted wages as price increases slow this year.

“The Fed is focused on the last mile, and so far, there has not been enough
evidence of a slowdown that will get inflation down to 2%,” said Kristin Forbes, a
professor at the Massachusetts Institute of Technology and former member of
the Bank of England’s Monetary Policy Committee.

Overall inflation is slowing largely because prices of energy and other goods are
falling. Large increases in housing costs have slowed, but haven’t filtered

https://www.wsj.com/articles/fed-approves-quarter-point-rate-hike-signals-more-increases-likely-11675278190 4/6
2/28/24, 11:43 AM Fed Slows Its Tightening With Quarter-Point Interest Rate Rise - WSJ

through to official price gauges yet. As a result, Mr. Powell and several colleagues
shifted attention recently toward a narrower subset of labor-intensive services
by excluding prices for food, energy, shelter and goods.

Inflation fell to 4.4% in December from 5.2% in September, as measured by the 12-
month change in the personal-consumption expenditures price index excluding
food and energy. Though still above the Fed’s 2% goal, it moderated in the
October-to-December period to an annualized 2.9% rate. But prices in the narrow
category of nonhousing services rose 4% in December over both the past year
and at a three-month annualized rate.

Ray Farris, chief economist at Credit Suisse, said the Fed is likely to continue to
signal it will hold rates at a higher level for longer than the market expects to
prevent inflation from picking up again or settling at an uncomfortably high
level. That posture could reflect officials’ regret, in retrospect, at waiting too
long to withdraw reservoirs of stimulus in the second half of 2021, he said.

“They have to live with the perception that they blew it. And they can’t blow it on
the way down,” said Mr. Farris. “The Fed cannot be in a position where it
declares victory at 3.5% inflation, only to have some random new shock in the
system push headline inflation back up to 5%.”

Indeed, Mr. Powell suggested that he continued to see the risk of not raising
rates enough and allowing inflation to reaccelerate to be more dangerous than
raising rates too high and causing a recession. In the latter alternative, the Fed
could react immediately by cutting rates, he said.

The first mistake would be harder to fix because it would risk a period of more
entrenched inflation that would ultimately require a deeper recession to break
consumers’ and business expectations of higher prices, he said. “I continue to
think that it’s very difficult to manage the risk of doing too little and finding out
in six or 12 months that we actually were close but didn’t get the job done and
inflation springs back,” Mr. Powell said.

Write to Nick Timiraos at nick.timiraos@wsj.com

Corrections & Amplifications

Fed officials left unchanged the guidance in their postmeeting policy statement

https://www.wsj.com/articles/fed-approves-quarter-point-rate-hike-signals-more-increases-likely-11675278190 5/6
2/28/24, 11:43 AM Fed Slows Its Tightening With Quarter-Point Interest Rate Rise - WSJ

that has said since last March that they anticipate “ongoing increases” in
interest rates “will be appropriate.” An earlier version of this article incorrectly
said the statement said those increases “are likely appropriate.” (Corrected on
Feb. 1)

Inflation and the Economy

Analysis from The Wall Street Journal, selected by the editors

INFLATION TRACKER

Inflation at 3.1% Fed Signals Cuts Job Quitting Fell What Recession?
Reflects Stubborn Are Possible but 12% Last Year—and 2023 Growth Ended
Pricing Pressure Not Imminent That’s Bad News Up Accelerating

Appeared in the February 2, 2023, print edition as 'Fed Approves Quarter-Point Rate Increase'.

https://www.wsj.com/articles/fed-approves-quarter-point-rate-hike-signals-more-increases-likely-11675278190 6/6