The U.S. Federal Reserve on Wednesday approved another hike in its benchmark interest rate, but at a slower pace of 0.25 percentage point, with the suggestion that "ongoing increases" will be needed to battle persistent inflation.

The decision lifts the federal funds rate, which banks charge each other for overnight borrowing, to a new target range of 4.50 to 4.75 percent.

While the short-term rate is the highest since September 2007, the latest increase, announced after a two-day meeting of the policy-setting Federal Open Market Committee, represents the smallest incremental move since March last year, when the U.S. central bank began its current tightening cycle in a bid to tame surging prices.

"Inflation has eased somewhat but remains elevated," the committee said in a statement, adding it is "highly attentive to inflation risks" as Russia's war on Ukraine is "causing tremendous human and economic hardship and is contributing to elevated global uncertainty."

U.S. Federal Reserve Chairman Jerome Powell speaks at a press conference on Feb. 1, 2023, in Washington. (Kyodo)

At its previous meeting in December, the Fed decided on an increase of half a percentage point, ending a run of four consecutive 0.75-point rises.

The eighth hike of the current cycle marks a return to the more orthodox approach of changing the rate in 0.25 percentage point increments. It comes amid signs that inflation may have begun to peak in the United States.

The Commerce Department said last week that year-on-year consumer price growth in December cooled to 5.0 percent, the lowest level since September 2021.

Earlier this week, the International Monetary Fund said in its updated outlook report that the world economy is forecast to grow 2.9 percent in 2023, up 0.2 percentage point from its previous forecast in October, attributing the improvement to easing inflation and robust household spending in many countries.

Still, the Fed said that ongoing tightening will be "appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time."

It also pledged to continue reducing its holdings of Treasury securities and other assets, while economists are increasingly trying to find clues as to when the Fed may pause its campaign to restore stability.

Although some economists had expected the phrase "ongoing increases" to disappear from the post-meeting statement, Fed Chair Jerome Powell suggested there is still a long way to go before inflation, which is at 40-year highs, can be brought back to the central bank's long-term goal of 2 percent, allowing policymakers to declare victory.

"The historical record cautions strongly against prematurely loosening policy," Powell said in a press conference following the committee's first meeting of the year. "We will stay the course until the job is done."

The chair ruled out the possibility of lowering rates this year even if the economy grows in line with expectations and indicated the Fed favors completing the tightening in one cycle, rather than pausing hikes and resuming later.

He said that at least a "couple of more" rate hikes would be necessary "because inflation is still running very hot."

But he also acknowledged for the first time that a "disinflationary process" has started, a comment that helped push up U.S. stocks and depreciate the value of the dollar.