Financial Markets Research Brief

Softening economic data warrants less-assertive rate increase. The Federal Reserve has extended its tightening cycle into 2023 by raising the federal funds rate to a lower bound of 4.50 percent. The 25-basis-point increase is nevertheless the smallest hike since March of last year, reflecting both easing inflation pressure and diminishing economic growth. Headline CPI actually dipped 0.1 percent on a monthly basis in December, for a year-over-year change of 6.5 percent. The 14-month low in consumer price escalation was joined by a dampened 2.1 percent improvement in U.S. real GDP for the year. Both data points align with the Fed’s goals of tempering economic growth in order to provide price stability. To grant time to assess, the central bank will likely take a more gradual path to rate hikes going forward.