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Interest rates go up again to combat inflation, albeit at a smaller rate

Jerome Powell
Posted at 5:55 AM, Dec 14, 2022

The Federal Reserve issued another interest rate hike on Wednesday as data from the Bureau of Labor Statistics shows that inflation is starting to ease.

Wednesday's interest rate increase of .5% was smaller than the rare hikes at previous meetings.

The Federal Reserve raised interest rates at its previous four meetings by .75%. After starting off 2022 at virtually a 0% federal interest rate, the rate increased to 3.75-4%. After Wednesday's increase, the rate range will go to 4.25-4.5%.

The Federal Reserve has said its goal is to get inflation back to 2% annually. As of new data released yesterday, inflation stands at 7.1%, which is down from a peak of 9.1% earlier this year.

While interest rate hikes tend to decrease inflation, some economists fear high interest rates can cause a recession. The Federal Reserve said it will continue to monitor economic conditions to strike a balance of lowering inflation while avoiding a recession.

"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 Reserve said on Wednesday.

One factor that Federal Reserve Chair Jerome Powell said might keep inflation high is a tight market for available workers. Labor participation has recently declined as the Baby Boomer population reaches retirement age. Wages are up over 5% in the last year, according to federal data.

Powell said because employers are having to pay more to find workers and that labor is the largest expense for most companies, inflation might not reach 2% for some time. He cited that there are 1.7 available jobs for each person looking for work.

He said the data justifies more moderate rate increases.

“The time for moderating the pace of rate increases may come as soon as the December meeting given our progress and tightening policy,” Powell said two weeks ago at the Brookings Institute. “The timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation.”

The effect of higher interest rates makes borrowing for big-ticket items, like homes and cars, more expensive.