The Federal Reserve raised its benchmark interest rate by a quarter of a percentage point last week during its first meeting of 2023. The move was in line with market expectations, with the Federal Open Market Committee boosting the federal funds rate to a target range of 4.5%-4.75%.
This is the highest target range since October 2007. The Fed approved four consecutive 0.75 percentage point moves in 2022, before going to a smaller 0.5 percentage point increase in December.
Many market watchers now expect the Fed to lift the benchmark rate above 5% in order to combat inflation in an economy where the labor market remains strong. This is due to the unexpected job growth in January, as reported by the Labor Department’s Non-farm payrolls. The job growth in January was 517,000, far above the Dow Jones estimate of 187,000, with the unemployment rate falling to a historic low of 3.4%.
Wages also posted solid gains in January, with average hourly earnings increasing 0.3% and up 4.4% from the previous year. This, combined with the increase in labor force participation rate and the employment-to-population ratio, reinforces the portrait of a persistently strong labor market.
The strong report has increased fears that the Fed might continue its rate hike trajectory, with interest rate futures now pointing to chances of the central bank delivering at least two more rate hikes. It appears that rates will continue to be raised above the initially anticipated threshold.
The Federal Reserve plans to meet in 2023 on the following dates: March 21-22, May 2-3, June 13-14, July 25-26, September 19-20, Oct/Nov 31-1, and December 12-13.