[Asia Economy New York=Special Correspondent Joselgina] The U.S. central bank, the Federal Reserve (Fed), carried out the so-called 'baby step' by raising the benchmark interest rate by 0.25 percentage points as the market expected. This move came as recent indicators clearly showed a slowdown in inflation, prompting the Fed to adjust the pace of further tightening.
On the 1st (local time), following the first Federal Open Market Committee (FOMC) regular meeting of the year, the Fed announced in a statement that it would raise the federal funds rate by 0.25 percentage points from the previous 4.25?4.5% to 4.5?4.75%. This is the highest level since October 2007.
The FOMC stated, "Inflation has somewhat eased but remains elevated. We are paying very close attention to inflation risks," adding, "Sustained rate hikes are necessary to maintain a sufficiently restrictive policy stance to bring inflation back to the 2% target." It also mentioned that in deciding the pace of rate increases, it will "consider the cumulative tightening of monetary policy, the lagged effects of monetary policy on economic activity and inflation, and economic and financial developments."
This decision to raise rates by 0.25 percentage points was already anticipated. Various indicators have confirmed signals that the cumulative effects of tightening are beginning to take hold. The 12 FOMC members unanimously decided on this additional pace adjustment. Previously, to lower inflation, the Fed took the unusual step of four consecutive giant steps (raising the benchmark interest rate by 0.75 percentage points each time), but at the last meeting in December, the Fed reduced the rate hike to 0.5 percentage points.
The December Personal Consumption Expenditures (PCE) price index, released ahead of the FOMC, recorded the smallest increase in 15 months, confirming easing price pressures. The core PCE price index, which the Fed closely monitors as the most accurate inflation gauge, also rose at the slowest pace in 14 months. Additionally, the Employment Cost Index (ECI) for the fourth quarter of last year, released the day before, fell short of market expectations, somewhat alleviating concerns about wage inflation pressures that the Fed has been monitoring. Consequently, some on Wall Street speculated that the Fed might discuss when to pause rate hikes at this meeting.
However, the Fed made it clear in its statement that tightening will continue. It reiterated the 2% inflation target and maintained the phrase that "ongoing increases" in rates are necessary. Local media assessed that the statement did not include any message regarding the timing of the expected pause in rate hikes that the market had anticipated. The market is currently awaiting the upcoming press conference by Fed Chair Jerome Powell.
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