WASHINGTON: The Federal Reserve increased its benchmark interest rate by a quarter point on Wednesday, marking the eighth increase since March, as part of an ongoing effort to combat high inflation. Additionally, the Fed indicated that even though inflation is declining, it is still high enough to warrant additional rate increases.

The Fed recognizes that the rate of inflation has slowed, according to Chair Jerome Powell, who also hinted that the Fed may be nearing the end of its rate increases. During his news conference, the stock and bond markets rose, indicating that they expect the Fed's credit tightening to pause soon.

Throughout his remarks Wednesday, Powell sounded a dual message. He frequently acknowledged signs that high inflation is slowing. “We can now say, I think for the first time,” he said, “that the deflationary process has started.” Yet he also stressed that it was too soon 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.”

Despite being less than the half-point increase in December and the four three-quarter-point increases before it, the Fed's rate increase on Wednesday will likely result in higher borrowing costs for many consumers and businesses as well as a greater risk of a recession. Officials from the Fed stated in a statement that "ongoing increases in the (interest rate) target range will be appropriate." It is widely believed that this indicates they will increase their benchmark rate once more in March and possibly in May as well.

Powell, however, reaffirmed his worry that service costs, such as restaurant meals, medical care, airline tickets, and similar items, are still rising. He has stated that because services require a lot of labour, he pays close attention to their costs. Strong wage growth can therefore sustain high inflation and keep the price of services high. Powell seemed to indicate on Wednesday that he anticipates two more quarter-point rate increases when he said, "We're talking about a couple more rate hikes to get to that level we think is appropriately restrictive," in reference to rates high enough to slow the economy. However, Wall Street investors have only factored in one more increase.

In a well-publicized speech last summer in Jackson Hole, Wyoming, Powell seized the chance to refute market predictions of impending rate cuts. In his speech, he reaffirmed the Fed's commitment to raising rates even if doing so resulted in "pain" like slower growth and higher unemployment. But on Wednesday, Powell passed up a chance to temper the market's inflated hopes.

In the financial markets, "our focus is not on short-term moves but on sustained changes," he declared. Instead, he pointed out that many financial indicators, such as mortgage rates, have increased significantly since the Fed started raising interest rates. The key short-term rate is directly under Fed control.

After the Fed started raising rates, the typical fixed rate for a 30-year mortgage skyrocketed. It eventually reached 7%, more than doubling where it had been prior to the hike.

The average mortgage rate has decreased since the fall, however, to 6.13%, the lowest level since September. This suggested that a few homebuyers may be returning to the market as a result of lower rates.

Powell dismissed any worries on Wednesday that the Fed might end up restricting credit too much and cause a recession. The Fed's target inflation rate of 2%, he continued, can be reached "without a significant economic downturn or significant increase in unemployment."

The slowdown in US inflation suggests that the Fed's rate hikes are beginning to have an impact. However, inflation is still much higher than the government's 2% target.

For instance, retail sales have decreased for the past two months in a row, indicating that consumers are becoming more frugal with their money. Since two months ago, manufacturing output has decreased. However, the job market in the country, which is the cornerstone of the economy, is still strong, with the unemployment rate at a 53-year low of 3.5%.

The Fed's increase came a day after the government reported that wages and benefits for American workers grew more slowly for the third consecutive quarter in 2022.

From a four-decade peak of 9.1% in June, overall inflation inched down to 6.5% in December from a year earlier. Along with the Fed, other significant central banks are raising interest rates to combat high inflation.

When it meets on Thursday, the European Central Bank is anticipated to raise its benchmark rate by half a point. Despite slowing, Europe's inflation rate, which was 8.5% in January compared to the same month last year, is still high.

At its meeting on Thursday, the Bank of England is also anticipated to increase its rate. The UK economy is expected to experience a recession this year, according to the International Monetary Fund