In a move that was widely expected, the U.S. Federal Reserve raised its key lending rate by 25 basis points to a range of 4.50% to 4.75%. This marks the eighth time the Fed has raised interest rates over the past year and a massive jump from near zero in March 2022.
On the plus side, the increase was lower than the half-point hike in December with the U.S. central bank saying that stubbornly high inflation was beginning to slow. “Inflation has eased somewhat but remains elevated,” the Fed said in a statement.
But, unlike the Bank of Canada, which has said it will pause further rate hikes, the U.S. central bank said “ongoing increases” will be needed to tackle inflation and get it down to a range of two percent.
This suggests the Federal Reserve will announce another rate hike when it meets next in March. More could follow after that.
Why Did the Fed Raise Its Key Lending Rate?
Like other central banks around the world, the Fed needs to raise rates to bring inflation down but not so fast that it tips the economy into a recession. This smaller, 0.25% increase is the Fed’s attempt to avoid stalling the economy.
Since peaking at 9.1% in June 2022, U.S. inflation has been steadily falling for six months, falling to 6.5% in December. January’s inflation data won’t be available until later in February.
While inflation has been steadily declining, the rate hike suggests the Fed is not entirely convinced that inflation is on its way back to two percent. This means more work needs to be done.
How High Will Rates Go in 2023?
The big question is how high will interest rates go in 2023? Back in December, officials at the Federal Reserve estimated that the federal funds rate would peak at a range of five percent to 5.25% and stay in that range for the rest of the year. That interest rate could be just high enough to stall the U.S. economy.
Analysts believe that the central bank will pause its rate hikes after hitting a range of 4.75% to 5.0% in March. The Fed will then begin to start cutting its key lending rate by the end of the year. Morgan Stanley, though, is more optimistic and thinks the most recent rate hike will be its last.
That optimism could help spark a stock market rally. The Nasdaq just finished its best January since 2001 while the S&P 500 capped off its best January in four years. The TSX meanwhile rallied 7.1% in January—its best monthly performance in two years.
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The U.S. Federal Reserve raised its interest rates by a quarter of a percent to a range of 4.50% to 4.75%. Where the Bank of Canada said it will pause future rate hikes, the Fed promised additional interest rate hikes would be coming to tame inflation.
Early signs of easing inflation and continued strength in the labour markets are helping fuel beliefs that Canada and the U.S. will avoid a recession. But it’s too early to make that call. Cutting back on rate hikes too soon could allow the economy to reflate and prices to get out of control.
Regardless of what the Bank of Canada or U.S. Federal Reserve does, the trading professionals at Learn-To-Trade.com can help investors make money no matter what the stock market is doing.
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