Federal Reserve raises rates by 25 basis points: 'Disinflationary process has started'

WASHINGTON (TND) — The Federal Reserve Open Market Committee voted unanimously Wednesday to raise the target range for the federal funds rate to 4.5% to 4.75%, a move firmly expected by economists and Wall Street. The 25 basis point is the smallest rate hike to come from the central bank since March of last year.

During a press conference following the announcement, Fed Chair Jerome Powell said shifting to the slower pace of rate hikes will aid their ability to assess progress but they still "have a lot of work to do." Recent months have brought consistent drops in both consumer and producer inflation, as well as a slowdown in consumer spending. For the first time, Powell said he thinks the "disinflationary process has started."

"We are seeing the effects of our policy actions on demand in the most interest-sensitive sectors of the economy, particularly housing. It will take time, however, for the full effects of monetary restraint to be realized, especially on inflation," Powell said.

Powell reiterated the Fed's view that ongoing rate increases will be appropriate in order to bring inflation down to its 2% target. He emphasized this will likely be accompanied by below-trend growth and softer labor market conditions.

“While recent developments are encouraging, we will need substantially more evidence to be confident that inflation is on a sustained downward path," Powell said.

A stubborn source of imbalance affecting the entire economy comes from the labor market. Further evidence of that came in December's Job Openings and Labor Turnover Survey released Wednesday by the Bureau of Labor Statistics showing the number of job openings was about 11 million on the last day of December, an increase of more than 500,000 openings from November. This means once again, there are roughly two open jobs for every unemployed person.

On the surface that may appear to create a headwind for the Fed but when paired with a slowdown in wage growth, as was reflected in Labor Department data Tuesday, it's a boon, according to Lightcast senior economist Layla O'Kane.

“That means that we’re not in sort of this fear of a wage-price spiral which is something that we had been concerned about for a little while as a potential and that also means that inflation is probably going to keep coming down and that’s good news for the Fed. It means that you know, some of the attempts at a soft landing that they've been working through in the last year are perhaps coming to fruition," O'Kane said.

O'Kane said the JOLTS report also disproved concerns of high-profile layoffs in the technology sector spreading to the rest of the economy or affecting the entire sector.

“Overall, we’re not seeing layoffs hugely spike, even in information and professional business services, which is where we would be looking and we’re not seeing those layoffs sort of be big in other sectors as well," O'Kane said.

In December quits and layoffs were little changed at 4.1 million and 1.5 million, respectively.