“Rise in line, although it reiterates that the increases will continue”

In its first release of the year and in line with expectations, the Fed increased the reference rate by 25bp to a range between 4.5-4.75% (the decision was unanimous), its highest level since October 2007. This decision represented a minor movement compared to the 50bp advance last December and the 4 increases of 75bp implemented throughout 2022.

The Committee anticipates continued increases in the target range will be appropriate to achieve a monetary policy stance tight enough to return inflation to 2% over time. In this sense, the Committee will consider the cumulative tightening that has been implemented (8 consecutive increases in the reference rate), the delays with which monetary policy impacts economic activity, inflation, and the evolution of financial conditions. Also, the Fed will continue to reduce its holdings of Treasury and agency debt and agency mortgage-backed securities (as described in previous communications).

On the other hand, the announcement highlighted that the latest indicators point to moderate growth in spending and production; meanwhile, the labor market’s performance has been robust in recent months, with an unemployment rate that has remained low. In terms of inflation, it highlighted that even though it has slowed down a bit, current levels remain high.

In his conference, Jerome Powell ratified that it is necessary to maintain a restrictive position for a while to restore stability in inflation. At the same time, he emphasized that the labor market operates under highly tight conditions. Finally, he communicated that it is gratifying to see a disinflationary process underway.

Expectations for the Reference rate

Source: Goldman Sachs

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