The Federal Reserve (Fed) raised its benchmark Fed Funds Rate by 50 basis points at its latest meeting, marking the seventh increase of the year. This follows four consecutive 75 basis point hikes at previous meetings in June, July, September, and November. The Fed Funds Rate is the interest rate for overnight borrowing for banks and does not affect mortgage rates. The Fed typically raises the Fed Funds Rate to slow the economy and curb inflation.
In a statement following the meeting, the Fed indicated that it will continue to increase the Fed Funds Rate as appropriate and will also continue its balance sheet reduction. Interestingly, 17 out of 19 members forecasted a Fed Funds Rate of over 5%. The terminal rate, or the highest the Fed Funds Rate will go in this cycle, was also increased by 50 basis points to 5.1% from 4.6%.
Initially, the markets responded negatively to this news as it indicated that the Fed planned to keep rates higher for longer than expected. However, during a press conference, Fed Chair Jerome Powell acknowledged that recent inflation data for October and November showed a “welcome reduction in the monthly pace of price increases.” Powell also signaled a 25 basis point hike at the Fed’s next meeting on February 1, which was seen as a positive sign as it suggests that inflation is coming under control.
