On December 14, 2022, the Federal Reserve raised interest rates by 50 basis points, lifting the federal funds target range to 4.25%–4.50%. The move marked a notable moderation in the central bank’s pace of tightening after four straight hikes of 75 basis points, signaling that while inflation remained a top concern, policymakers were becoming more sensitive to the cumulative effects of earlier increases.
The decision came as inflation data showed early signs of easing. The November Consumer Price Index rose 7.1% year-over-year, down from a peak of 9.1% in June and lower than economists had expected. Core inflation, which excludes food and energy, also slowed to 6.0%, suggesting that the worst of the inflation surge might be passing. Still, both measures remained well above the Federal Reserve’s long-standing 2% target.
Fed Chair Jerome Powell acknowledged the progress during his press conference but made clear that the fight against inflation was far from over. “We’ve made good progress, but we have more work to do,” Powell said. “It will take substantially more evidence to give confidence that inflation is on a sustained downward path.” He added that inflation in services, particularly shelter and labor-intensive sectors, remained persistently high.
The Federal Open Market Committee’s updated projections signaled a more extended tightening path than previously anticipated. The median forecast for the federal funds rate at the end of 2023 rose to 5.1%, implying at least three additional rate hikes in the new year. Fed officials also revised upward their projections for inflation and unemployment, with core inflation expected to remain above 3% through 2023 and unemployment projected to rise to 4.6%.
Markets initially welcomed the slower pace of rate increases, but Powell’s firm tone on continued tightening dampened optimism. Stock indexes dropped during his remarks, and Treasury yields fluctuated as investors reassessed the outlook for interest rates and economic growth. The Fed’s messaging made it clear that a pivot to easing was not yet on the horizon.
The labor market remained a key factor in the Fed’s decision-making. Despite a modest uptick in unemployment, job creation stayed robust, and wage growth continued to put upward pressure on service prices. Powell reiterated that bringing inflation down would likely require a period of below-trend growth and some softening in labor conditions.
The December hike brought interest rates to their highest level since December 2007, just before the global financial crisis. It capped a year of aggressive monetary policy tightening—the fastest annual rate increase cycle since the early 1980s—as the Fed battled to re-anchor inflation expectations and preserve its credibility.
While inflation was showing early signs of retreat, policymakers emphasized that premature easing could reverse the gains. Fed officials were unified in their message that the path toward price stability would be gradual and measured, with risks still tilted toward persistent inflation rather than economic contraction.
Looking ahead, the Fed stated it would remain “data dependent,” closely watching economic indicators for signs of inflation, labor market dynamics, and financial system stress. The path for interest rates in 2023 would be shaped by how quickly inflation moderates and how resilient the broader economy remains in the face of higher borrowing costs.
