The Federal Reserve extended its fight against high inflation Wednesday by raising its key interest rate by a quarter of a percentage point, the eighth increase since March.
And Fed officials signaled that even though inflation in the United States is easing, prices remain high enough to require more rate increases in coming months.
Though smaller than its half-point increase in December -- and a series of three-quarter-point increases earlier last year -- the Fed's move Wednesday will further raise the costs of many consumer and business loans, and perhaps the risk of a recession.
Speaking after the rate announcement, Fed Chair Jerome Powell sounded a dual message. Powell frequently acknowledged signs that high inflation is slowing.
"We can now say, I think, for the first time," he said, "that the disinflationary process has started."
Yet he also stressed that it was too soon still to declare victory over the worst inflation bout in four decades: "We will need substantially more evidence to be confident that inflation is on a long, sustained downward path."
Markets seesawed after the announcement. The S&P 500 rallied back from an early 1% loss Wednesday to add 1% on the day. The Nasdaq jumped 2%, and the Dow ended barely higher. Speculation is widespread among Wall Street investors and many economists that with inflation cooling, the Fed will soon decide to halt its aggressive drive to tighten credit and cool the economy.
In December, the Fed forecast it would eventually raise its benchmark rate to a level now requiring two additional quarter-point increases. Yet Wall Street investors have priced in only one more. Collectively, investors expect the Fed to reverse course and actually cut rates by the end of the year.
The divide between policymakers and investors is important because rate increases need to work through markets to affect the broader economy. The Fed directly controls its key short-term rate. But the Fed has only indirect control over rates that consumers and businesses actually pay -- for mortgages, corporate bonds, auto loans and many other types of borrowing.
Over the past several months, Fed officials have reduced the size of their rate increases, from the four unusually large three-quarter-point increases in a row earlier last year to the half-point increase in December.
The quarter-point increase Wednesday is intended to help Fed officials navigate what will be a high-risk series of decisions this year. The slowdown in inflation suggests that the Fed's rate increases have started to achieve their goal. But measures of inflation are still far above the central bank's 2% target.
The risk is that with some sectors of the economy already weakening, ever-higher borrowing costs could tip the economy into a recession later this year.
Effects of the higher rates can be seen especially in the housing market. The average fixed rate on a 30-year mortgage soared after the Fed first began lifting rates in March, eventually topping 7% last year.
In February 2022, the rate stood at about 3.5%.
The 30-year rate has eased recently to 6.13%, the lowest level since September. And while home sales fell further in December, a measure of signed contracts to buy homes actually rose in January, suggesting slightly lower rates of late have drawn some buyers back to the market.
Additionally, retail sales have fallen for two straight months, suggesting consumers are becoming more cautious about spending. Manufacturing output has fallen for two months, as well.
On the other hand, the nation's job market -- one of the most important pillars of the U.S. economy -- remains strong, with the unemployment rate at a 53-year low of 3.5%.
Vacancies at U.S. employers unexpectedly increased at the end of 2022, illustrating a still-solid appetite for labor, which the Fed sees as one of the final hurdles to bring down inflation.
The number of available positions climbed to a five-month high of just over 11 million in December from 10.4 million a month earlier, the Labor Department's Job Openings and Labor Turnover Survey, or JOLTS, showed Wednesday. The increase was the largest since July 2021 and mostly reflected a jump in vacancies in accommodation and food services.
Despite the uptick in available positions, recent gauges show U.S. wage growth is slowing. Powell has expressed concern that wage growth in the labor-intensive service sector would keep inflation too high.
Overall, consumer inflation eased to 6.5% in December from a year earlier, down from a four-decade peak of 9.1% in June. The decline has been driven in part by cheaper gas, which has tumbled to $3.50 a gallon, on average, nationwide, from more than $5 in June, according to AAA.
Supply chain backups have also largely been cleared, leading to a drop in prices for manufactured goods. Used car prices, having skyrocketed in the pandemic amid an auto shortage, have now fallen for several months.
Information for this report was contributed by Christopher Rugaber and Stan Choe of The Associated Press, Jeanna Smialek and Isabella Simonetti of The New York Times, and Molly Smith of Bloomberg News.