WASHINGTON — The Federal Reserve raised its benchmark interest-rate target by half a percentage point Wednesday to 4.25%–4.50%, slowing the pace after four consecutive 0.75-point increases while signaling that the campaign against inflation is likely to require higher rates for longer than officials projected three months ago. The Federal Open Market Committee’s statement said ongoing increases in the target range will be appropriate to reach a stance restrictive enough to return inflation to 2% over time.

The smaller step is not a declaration of victory. New economic projections show a median federal-funds rate of 5.1% at the end of 2023, up from 4.6% in the September projection. Officials simultaneously lowered their median 2023 real-growth forecast to 0.5% and raised the projected unemployment rate to 4.6%, illustrating the tradeoff the central bank is prepared to accept as it tries to cool price pressures.

Inflation is easing, but remains far above target

The rate decision came one day after the Bureau of Labor Statistics reported that the consumer price index rose just 0.1% in November and was up 7.1% over the previous 12 months. The CPI report was better than many forecasters expected and marked a continued retreat from the 9.1% annual rate reached in June. Energy prices fell 1.6% during November, while food prices rose 0.5% and shelter remained the largest contributor to the monthly increase.

That moderation gives the Fed room to reduce the size of individual increases, but not necessarily the ultimate level of rates. Chair Jerome Powell emphasized at his post-meeting press conference that the central question is how restrictive policy must become and how long it must remain there. The Committee is trying to separate the pace of tightening from the destination: smaller moves can coexist with a higher eventual peak.

The central bank’s preferred inflation measure, the personal consumption expenditures price index, is also running well above the 2% goal. Fed participants now project median PCE inflation of 3.1% in 2023 and core PCE inflation of 3.5%, with both moving closer to 2% in later years. Those projections are forecasts, not promises, and officials have repeatedly said incoming data will determine policy.

A labor market that has not cooled enough

The other side of the Fed’s mandate remains unusually strong. The November employment report showed nonfarm payrolls increasing by 263,000 and unemployment holding at 3.7%. In the Bureau of Labor Statistics commissioner’s statement, job growth remained broad enough to suggest that labor demand is still substantial despite higher borrowing costs and slowing activity in interest-sensitive sectors.

For the Fed, that strength is double-edged. Continued hiring supports household income and reduces recession risk, but a tight labor market can also sustain wage growth and service-sector inflation if demand for workers continues to exceed supply. Officials are watching vacancies, quits, wage measures and labor-force participation for evidence that the imbalance is narrowing without a sharp rise in unemployment.

The December projections imply that policymakers expect some deterioration. The median unemployment-rate forecast rises from 3.7% at the end of 2022 to 4.6% in 2023 and stays at 4.6% in 2024 before easing. That is not presented as a policy objective, but it reflects the Fed’s judgment that bringing inflation down will probably involve a period of below-trend growth and softer labor demand.

The mechanics of tightening continue

The Fed’s implementation note directs the New York Fed to maintain the federal-funds target range at 4.25%–4.50% and adjusts administered rates used to keep money-market conditions inside that band. At the same time, the central bank is continuing to shrink its balance sheet by allowing Treasury and agency securities to mature subject to monthly caps.

That balance-sheet reduction works alongside rate increases by removing some of the extraordinary accommodation created during the pandemic. The combined effect is visible most clearly in borrowing costs. Mortgage rates, corporate financing costs and other market yields have risen sharply this year, slowing housing activity and affecting asset valuations even before every rate increase has fully worked through spending and investment decisions.

Minutes from the Fed’s previous November meeting showed that a substantial majority of participants believed it would soon be appropriate to slow the pace of increases. Wednesday’s action implements that judgment. But those minutes also made clear that officials were more concerned about doing too little to suppress inflation than about the optics of a slower step.

The policy question shifts from speed to duration

At 4.25%–4.50%, the target range is already at its highest level since 2007. The Fed has moved from near zero in March to restrictive territory in nine months, one of the fastest tightening cycles in decades. That speed means monetary policy is still working through the economy with uncertain lags.

The new projections show why the Committee is not ready to stop. A 5.1% median rate at the end of next year implies more tightening from today’s level and no rapid pivot back to easy policy. Officials are signaling that even if future increases are smaller, rates may need to remain restrictive until there is convincing evidence that inflation is returning toward 2% on a sustained basis.

For households and businesses, the distinction is consequential. The era of ever-larger three-quarter-point moves may be ending, but the period of expensive credit is not. November’s CPI data provide evidence that inflation is moving in the right direction. The Fed’s December decision says that one encouraging report — or even several — is not yet enough to conclude that the underlying inflation problem has been solved.