Fed looks to moderate interest rate increases amid ongoing inflation

Yahoo Finance’s Jennifer Schonberger breaks down the top takeaways from Fed Chair Powell’s remarks on inflation and the path of rate hikes on Wednesday.

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- Well, let's take a deeper dive here now on the Fed after the decision to raise rates again by another 75 basis points. Fed Chair Powell warning levels of US interest rates will go higher than previously projected. Take a listen.

JAY POWELL: At some point, as I've said in the last two press conferences, it will become appropriate to slow the pace of increases as we approach the level of interest rates that will be sufficiently restrictive to bring inflation down to our 2% goal. There is significant uncertainty around that level of interest rates. Even so, we still have some ways to go. And incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected.

- With more on the road ahead for the Fed, let's get to Yahoo Finance's Jennifer Schonberger. And Jen, we saw the reaction of the markets yesterday. But, certainly, the Fed chair making pretty clear that the data is just not where they want it to be.

JENNIFER SCHONBERGER: Good morning, Akiko. That's right. Fed Chair Powell setting the table to begin slowing down the pace of rate hikes, but says the question of when to moderate the size of rate increases isn't as important as ultimately how high the central bank will ultimately raise the Fed funds rate to tame inflation. Powell says interest rates will now rise higher than forecast until the Fed gets to a level that's, quote, "sufficiently restrictive."

All this means the interest rate projections for ending rate hikes around the level of 4.6% forecast back in September are now too low. So the question is, how much higher do they go from here? Well Roberto Perli, who is a long time Fed Watcher over at Piper Sandler, says he thinks the peak rate could rise to 4.8% at minimum, though he says the Fed can't continue hiking at 75 basis points every meeting, which is why they're looking to slow down. If they did, they would reach 10.6% by the end of next year.

Now, the market is pricing in a peak Fed funds rate of 5.15% in June of next year. That's about 20 basis points higher than before the Fed meeting. Will Stith, a bond portfolio manager over at Wilmington Trust, says he thinks the terminal rate might not also be higher, but also stay higher for longer than what the market is expecting, given that the Fed hasn't seen progress on inflation like they would like.

Now, Powell says he doesn't think the central bank has over tightened. But perhaps the risk of continuing to raise rates aggressively risks cratering the economy, which is why the Fed is looking to slow the pace of rate hikes so the economy can better digest those. Indeed, analysts over at Bank of America say that policy lags complicate the ability of the Fed to judge their prior actions on the economy and that now that they're moving into more restrictive territory, the risk-reward trade off favors smaller rate hikes going forward. Akiko.