Photo: Getty Images
The Federal Reserve announced it is hiking interest rates by 0.5 percentage points on Wednesday (December 14). The anticipated increase brings the benchmark to a range of 4.25%-4.5%, which is the highest that interest rates have been in 15 years.
The sixth rate hike of the year comes as inflation continues to rise, but at a slower rate. On Tuesday, data released by the U.S. Bureau of Labor Statistics showed the consumer price index increased by just 0.1% from October to November. The year-to-year increase was 7.1%, which was the lowest 12-month increase since December 2021.
"Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures," the Federal Open Market Committee said in a statement.
Stocks rallied ahead of the announcement, with the Dow Jones Industrial Average up by more than 200 points. The S&P 500 was up by around 20 points, while the Nasdaq was trading ahead by more than 40 points about 30 minutes before the announcement.
After the FOMC released its statement, stocks quickly turned south, with all three indexes plunging into the red. Investors were concerned over the Fed's suggestion that interest rates will top out at 5.1% by the end of 2023.
"The big issue that makes it hawkish is that the Fed's forecasts put the terminal rate at 5.1% for 2023 from 4.6% at the September meeting," Jim Caron of Morgan Stanley Investment Management said, according to CNBC. "There's no tip of the hat to the notion that [the pace of] inflation is starting to decline. They just completely ignored it."
In a news conference, Federal Reserve Chairman Jerome Powell said the central bank needs to see more evidence that inflation is trending downward before easing interest rates.
"The inflation data received so far for October and November show a welcome reduction in the monthly pace of price increases. But it will take substantially more evidence to give confidence that inflation is on a sustained downward path," Powell said.
While stocks recovered a bit in late-day trading, the Dow closed down by 142 points. The S&P 500 finished the day 24 points in the red, while the Nasdaq was down nearly 86 points.