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February 2023

The Fed Remains Hawkish

Key Points

  • The Fed clearly in a transition phase regarding monetary policy
  • The Fed now believes more gradual pace of rate of increases is best for the economy
  • The Fed will keep key interest rates higher for longer

The Federal Reserve is clearly in a transition phase regarding monetary policy. It remains very hawkish, but the pace of increasing short-term interest rates to constrict economic growth and curtail the high level of inflation is slowing.

In the second half of last year, the Fed was on a very aggressive path of raising the federal funds rate. At one point, they raised the funds rate by 75 basis points at a record four consecutive meetings (chart 1). At its December meeting, the Fed ratcheted down the hike to 50 bps, and then last week, they increased the rate by just 25 bps.


Looking forward, the Fed has planned a total of 50 bps more rate increases this year to a level of 5.125%. With the pace of inflation moderating and demand for labor slowing, the Fed now believes that the more gradual pace of rate increases is the best policy. It will buy them more time to monitor how the economy is responding to interest rate increases already in place.

The Fed believes the catalyst for the high level of inflation is the imbalance in the labor market. For example, there are 5.7 million more job openings than people looking for a job (chart 2). That works out to be 1.9 jobs available for each person seeking a job, which is about three times the long-term average. That is an enormous imbalance that keeps wage pressures very high, which is leading to higher costs for businesses, which is leading to elevated inflation levels.


The Fed believes keeping interest rates higher for longer will reduce consumer demand and bring the labor demand/supply imbalance back into balance. This is the Fed’s plan for getting the inflation rate back to its target rate of 2.0%.


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