US Central Bank Tightens Monetary Policy Again to Bring Benchmark Rates to the Highest Level Since 2007

The US central bank increased benchmark interest rates by 50 basis points on Wednesday, in a sign that it is moderating the red hot mission to bring down inflation. With the latest rate hike, the US rates are in the range of 4.25-4.50 percent, which is still the highest since 2007.

In the rate setting meeting in November, the US Federal Reserve had raised the benchmark lending rate by 0.75 percentage point, which marked the sixth rate hike this year. Though the latest rate hike is lower than most analysts estimated, the Fed suggested on Wednesday that more rate hikes are likely on the way.

“The committee anticipates that ongoing increases in the target range will be appropriate” the Fed said, indicating that it needs to take more restrictive actions to bring inflation under control. The Fed’s aggressive moves to rein in inflation has been hurting the broader economy, especially sectors like housing.

In late November, reports indicated that a significant majority of policymakers at the US Fed felt that it will be appropriate to consider the slowing of the rate hikes. The report came amid concerns over the impact of several rounds of federal rate hikes over the past year. The minutes of the policymakers’ meeting earlier in November showed that a ‘substantial majority’ of policymakers thought it was now okay to reduce the pace of the rate hike, Reuters reported.

“A slower pace … would better allow the (Federal Open Market) Committee to assess progress toward its goals of maximum employment and price stability …The uncertain lags and magnitudes associated with the effects of monetary policy actions on economic activity and inflation were among the reasons cited,” the minutes said.

The Fed has been battling accusations that it has gone too quickly on monetary tightening. Fed chief Jerome Powell has denied the charges, saying instead that high inflation will inflict more pain on the economy.

In a big relief to the central bank, November inflation data showed that consumer inflation in the United States eased. The consumer price index, a key gauge of inflation, recorded its smallest annual increase in nearly a year in November.

Analysts believe that the Fed will keep taking restrictive actions to target inflation going forward. “Powell is unlikely to deviate from his clear line that the Fed will do whatever is necessary to squeeze out inflation, and that some pain will be necessary,” said Ian Shepherdson of Pantheon Macroeconomics, according to Reuters.