Alex Wong/Getty Images
- The Federal Reserve raised interest rates 25 basis points on Wednesday.
- It marks a slowdown from December’s increase of 50 basis points.
- This announcement comes on the heels of data showing inflation cooling down in the country.
The nation’s central bank just made its latest move responding to the country’s promising pandemic recovery.
On Wednesday, the Federal Reserve announced it is raising interest rates by 25 basis points, marking a slowdown from its December hike of 50 basis points. This latest increase comes after weeks of data showing the economy is moving in the right direction — gross domestic product (GDP) grew at an annualized rate of 2.9% in the last quarter of 2022, and the Consumer Price Index, which measures inflation, rose 6.5% year-over-year in December, a slowdown from November’s reading of 7.1%.
The Fed’s continued actions to slow its interest rate hikes is a promising sign for those concerned about a recession this year. The central bank has reiterated that it will continue to take necessary steps to reach its goal of the pre-pandemic level of 2% inflation, and it’s now looking more likely that the Fed can reach that goal while still managing to maintain a soft landing, or fighting high prices while avoiding a severe economic downturn.
Still, as Fed Chair Jerome Powell indicated in the December Federal Open Market Committee (FOMC) meeting, it’s premature to definitively say the US can avoid a recession in 2023.
“I don’t think anyone knows whether we’re going to have a recession or not,” Powell said at the time. “And if we do, whether it’s going to be a deep one or not, it’s just, it’s not knowable.”
The Summary of Economic Projections the Fed released in December also said a 2% inflation level likely will not be achieved by the end of next year, showing how further tightening will still be needed in the months to come — and FOMC’s December minutes confirmed that not one participant thought it will be appropriate to cut interest rates this year.
Democratic and Republican lawmakers appear to be split on whether the Fed should continue tightening. GOP Rep. Andy Barr, chair of the Financial Services subcommittee on monetary policy, told Punchbowl News that he doesn’t “care if inflation numbers have eased somewhat.”
“The Fed is still a good distance away from its 2% target,” he said. “I think fortitude on tightening has got to be the theme here.”
But some Democratic lawmakers have been cautioning Powell on the risks of continuing to raise interest rates because it could lead to a recession. On Monday, Democratic Sen. John Hickenlooper sent a letter to Powell urging him to pause the hikes, saying that they “will only make it more expensive for small businesses to fund their operations. It will also put a drag on consumer spending, which accounts for two-thirds of the economy.”
Massachusetts Sen. Elizabeth Warren has also been urging Powell for months now to stop raising interest rates, saying during a November speech that the Fed “risks pushing our economy off a cliff.”
“Of course the Fed has a role to play in getting inflation under control, but there is a big difference between landing a plane and crashing it,” Warren said.
Powell has continued to maintain that further hikes are necessary to lower prices for Americans, and Treasury Secretary Janet Yellen is on board with that plan, saying last week that good economic data isn’t sufficient to stop the increases.
“I’m reasonably satisfied by the data that I’ve seen so far, but I don’t want to minimize the risk of recession,” Yellen told Bloomberg in Johannesberg. “The path that I see, to maintaining a strong labor market while bringing inflation down, does involve a slowdown in growth.”