Interest rates will remain at their highest levels since early 2001 into the new year, the Federal Reserve announced Wednesday. The federal interest rate range will stay between 5.25% and 5.5%.
To help the Federal Reserve in its decision-making process,the Bureau of Labor Statistics released updated figures on Tuesday showing inflation is easing. The new data also shows that wages have more than kept up with inflation over the last year.
But those very same wage increases have also been what has kept inflation from falling. Powell has stated the Federal Reserve's goal is to keep inflation to an annualized rate of 2%. As of November, it was 3.1%, but a far cry from the over 9% inflation the U.S. experienced in the middle of 2022.
"The Committee seeks to achieve maximum employment and inflation at the rate of 2% over the longer run," the Federal Reserve said. "The Committee will continue to assess additional information and its implications for monetary policy. In determining the extent of any additional policy firming that may be appropriate to return inflation to 2% over time, the Committee 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."
Federal Reserve Chair Jerome Powell has said the Federal Reserve is trying to balance the need to reduce inflation while preventing the labor market from being stifled. In recent cases when interest rates increased, like they did in 2000 and 2007, a recession followed.
"I have always felt that there is a possibility that the economy could pull out of recession as inflation falls, and so far we are seeing that," Powell said. "However, the outcome is not guaranteed."
Powell has noted that food and energy costs have not increased at high rates in the last year, but there are underlying factors that could continue driving inflation in the coming months.
"High inflation imposes a significant hardship on all households and is especially painful for those least able to meet the higher costs of essentials like food, housing and transportation," Powell said earlier this month. "Beginning in early 2022, we reacted forcefully, raising our policy interest rate and decreasing the size of our balance sheet to help slow the economy and bring down inflation."
In additional data released Wednesday,the Federal Reserve projects inflation will drop to about 2.4% by the end of 2024. Interest rates could remain elevated, at a projected 4.6%, by the end of 2024.
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