Final Rate Hike of 2022

The Federal Reserve yesterday raised interest rates by 0.5%, capping off a year of aggressive rate hikes to curb 40-year high inflation. The move brings the benchmark federal funds rate from near zero in March to a range of 4.25%-4.5%, a 15-year high. The rate affects borrowing costs for businesses and consumers, including for mortgages, auto loans, and credit cards.

The hike is the year's seventh and marks a step down from four consecutive 0.75% increases. The interest rate is expected to continue to climb next year, with most Fed officials signaling plans to raise rates higher than previously expected to between 5% and 5.5%. Economic projections (see here) released yesterday also show officials expect the economy to slow down next year, estimating unemployment to rise to 4.6%, compared to 3.7% in November.

Because of a lag between the rapid rate hikes and the resultant economic response (see 101), the long-term impact of the cumulative hikes remains to be seen.