Five aspects of the Federal Reserve's recent rate hike that raised eyebrows

On Wednesday, the Federal Reserve increased the federal funds rate by 0.25 percent, bringing it to a range of 4.5 to 4.75 percent. This marks the eighth consecutive rate hike since March 2020. This latest hike is the smallest since the Fed began raising interest rates last year. Given the decreasing prices and slower economic growth, the Fed is slowing the tempo of its rate increases. Here are five things to know about the Fed's plans for the future.

The Federal Reserve anticipates a mediocre rate of economic growth in 2023, but not a decline in the economy.

At a press conference following the meeting Wednesday, Federal Reserve Chair Jerome Powell said that most FOMC members are not anticipating a recession this year. He stated that growth is expected to remain subdued, but there are other factors to consider. These include positive international economic trends, increasing consumer sentiment due to disinflation, and state and local governments having more resources. Powell suggested that these factors may help to support positive growth in the year ahead. The FOMC also amended their December statement to reflect that the effects of the pandemic and the war in Ukraine are lessening.

The United States' Gross Domestic Product (GDP) decreased over the first two quarters of 2022 but then increased at an annualized rate of 3.2 percent in the third quarter and 2.9 percent in the fourth quarter, which resulted in a 2.1-percent annual growth. This has been considered a sign of a potential soft landing, which is defined as a few quarters of flat growth, according to economist Brian Bethune.

The Fed can’t protect the economy from a debt default

Fed Chair Jerome Powell said Wednesday that the Fed cannot protect the economy if lawmakers and the White House don't reach an agreement to raise the debt ceiling, a situation that could become a reality in June. He asserted that no one should assume the Fed can shield the economy from the consequences of any delays in congressional action.

When asked about alternative solutions, such as minting a trillion-dollar coin, Powell only said that the Fed is the Treasury Department's fiscal agent and that it is Congress' job to raise the debt ceiling. He also declined to comment on the potential implications of prioritizing certain debt payments over others, stating that the only way forward is for Congress to increase the debt ceiling to ensure all obligations are paid.

“There’s only one way forward here and that is for Congress to raise the debt ceiling so that the United States government can pay all its obligations.”

The Fed said inflation isn’t coming down everywhere

On Wednesday, Powell reported that the Federal Reserve has noticed disinflation in certain parts of the economy. He stated that the cost of goods has decreased, though prices in some sectors remain high. The FOMC reported that in general, inflation has gone down but is still relatively elevated. CPI and PCE have both declined since June, and are now at 6.5% and 5% year-over-year, respectively.

More rate hikes but not bigger ones

At its rate-setting meeting on Wednesday, the Federal Open Markets Committee (FOMC) stated that it anticipates continuing interest rate increases and is currently debating the extent of such future increases. This is a change from the language used at the FOMC's December meeting, where members were debating the pace of future rate hikes.

It is likely that the FOMC's next meeting in March will result in another 25 basis-point rate hike, and there is the possibility of another 25 basis-point hike at the following May meeting. The FOMC stated that it is aiming to return inflation to 2 percent in the long-term and anticipates that this goal can be achieved with "ongoing increases in the target range".

The Fed did not release an updated forecast at Wednesday's meeting, but some economists worry that the smaller rate hike might make it difficult for the FOMC to reach its current projections. During a press conference, FOMC Chair Jerome Powell stated that the Fed's terminal rate "could certainly be higher than we're writing down right now."

The job market holding strong

The figures from the Wednesday's Job Openings and Labor Turnover Survey (JOLTS) from the U.S. Labor Department showed increasing strength in the labor market, with a 5.5 percent jump in job openings to 11 million. This ratio of two job openings for every unemployed person in the workforce favored job seekers and workers, according to the Labor Department. Federal Reserve Chairman Jerome Powell pointed out that there is a significant demand for labor that surpasses the available supply of workers. Fed officials have estimated the jobless rate to reach 4.6 percent in 2023, which is more than a full percentage point higher than its current level of 3.5 percent, the lowest since 1969. This figure is expected to be updated by the Fed in March when they release their next Summary of Economic Projections.