US Fed eases pace of interest rate hikes

The US Federal Reserve hiked its target interest rate by the least since last March, noting that inflation had "eased somewhat," even as it reiterated more work is needed to bring down inflation that last year hit four-decade highs.

The Federal Open Market Committee (FOMC) raised the federal funds target rate by 25 basis points, the smallest increase since it began raising rates 11 months ago to quash inflation. It was the eighth rate hike in a row and it followed a 50 basis point hike in December that came after four consecutive 75 basis point hikes. The string of rate increases has taken the target rate to a range of 4.5-4.75pc from near zero at the beginning of 2022 in the most aggressive tightening since the 1980s.

The FOMC reiterated language from prior statements that it "anticipates that ongoing increases in the target range will be appropriate" to return inflation to its 2pc target "over time." It also reiterated that future rate increases "will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments."

The slowing pace of rate increases comes as inflation has eased from last year's highs amid mounting signs the economy is slowing. Manufacturing has contracted for three months, home construction and purchases have cooled and consumer spending is weakening. While technology companies have begun mass layoffs in recent weeks, the labor market remains robust, with unemployment at five-decade lows.

By raising the federal funds rate, an inter-bank overnight lending rate whose effects ripple across consumer and business lending rates, the Fed undermines demand for big-ticket items like cars, homes and equipment to rein in pricing pressures.

The US consumer price index in December rose by 6.5pc on an annual basis, the lowest since October 2021 and down from a 9.1pc peak in June, the highest since 1981.

By Robert Willis