The U.S. Federal Reserve on Wednesday decided to raise its benchmark interest rate as it continues to battle high inflation, but by a smaller 0.5 percentage point than the previous four hikes.

While lifting the target range of the federal funds rate to 4.25 to 4.50 percent, the central bank also revised upward an estimate for where the hikes will ultimately top out in a policy tightening cycle, expecting the so-called terminal rate to be 5.1 percent.

Following a two-day meeting of the policy-setting Federal Open Market Committee, the central bank maintained its stance in a statement, noting it "anticipates that ongoing increases in the target range will be appropriate" to bring down inflation to its goal of 2 percent over time.

U.S. Federal Reserve chief Jerome Powell speaks at a press conference in Washington on Dec. 14, 2022, after a meeting of the central bank's policy-setting committee. (Getty/Kyodo)  

 

The smaller rate hike, which ends a series of huge 0.75-point increases that started in June, was widely expected as Fed Chairman Jerome Powell said in late November that the time for moderating the pace of increases "may come as soon as the December meeting."

"In determining the pace of future increases in the target range, the committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments," the Fed said in its statement on Wednesday.

The central bank also released its new economic projection, expecting the benchmark borrowing rate to come to 5.1 percent at the end of 2023 before falling to 4.1 percent in 2024, compared with September projections of 4.6 percent and 3.9 percent, respectively.

The U.S. gross domestic product is forecast to increase a real 0.5 percent in the fourth quarter of 2022 from a year earlier, revised upward from the 0.2 percent expansion estimated in September. The economy is then estimated to grow 0.5 percent next year.

The unemployment rate is projected to be 3.7 percent at the end of 2022, down 0.1 point from the previous forecast, and 4.6 percent in 2023.

Inflation -- gauged by the price index for personal consumption expenditures -- is expected to rise to 5.6 percent by the end of 2022 from a year before, an upward revision from the earlier forecast of a 5.4 percent increase, before slowing to 3.1 percent in 2023.

The Fed has been showing its determination to continue tightening its monetary policy to tamp down inflation, even at the cost of slower growth.

Facing the highest inflation in about 40 years on the back of Russia's war in Ukraine which began in February, the Fed started lifting the target range for the federal funds rate the following month after keeping interest rates near zero to support the coronavirus pandemic-hit economy.

In the June meeting, the Fed decided on its largest rate hike since November 1994, moving ahead with a 0.75 point increase. It then approved rate hikes of the same size at its July, September and November meetings.

When raising the interest rates, the U.S. central bank usually moves the figure by 0.25 point at a time.