The Federal Reserve has raised its lending reference rate for the 10th consecutive time to fight inflation while preventing new banking concerns from spreading.
As widely expected, the US Federal Reserve announced another quarter-point rate hike on Wednesday, bringing the policy rate to a range of 5 percent to 5.25 percent.
It could be the last hike before the Fed pauses its rate hikes as policymakers try to balance their inflation struggles with concerns about the impact of high interest rates on the economy and the banking sector.
After a relatively quiet period for banks following crisis-level concerns in March, there was some turbulence again this week with the collapse of California-based lender First Republic.
The commercial bank’s bankruptcy, the second largest in U.S. history, was announced early Monday, along with a sale to JPMorgan Chase, in a swift turnaround that regulators hoped would ease jitters over the financial sector. .
Jerome Powell, chairman of the Federal Reserve Board, is seen in a file photo. The US central bank announced another quarter-point rate hike on Wednesday
The Federal Reserve has raised its benchmark rate for the 10th consecutive time to fight inflation while avoiding new banking concerns
The US Federal Reserve began its aggressive campaign of rate hikes in March last year and has now raised rates 10 times in a row to help tackle inflation, which remains stubbornly high
Inflation has fallen from a peak of 9.1 percent in June to 5 percent in March, but remains well above the Fed’s target of 2 percent.
“Inflationary pressures remain high and the process of bringing inflation back to 2 percent has a long way to go,” Fed Chairman Jerome Powell said at a news conference on Wednesday.
But after Wednesday’s decision, the Fed hinted it could pause further rate hikes from its next meeting in June.
In a statement following its latest policy meeting, the Fed removed an earlier sentence saying “some additional” rate hikes may be necessary.
It replaced that sentence with language that said it would consider a range of factors when “determining the extent” to which future increases might be necessary.
The Fed’s rate hikes over the past 14 months have more than doubled mortgage rates, increased the cost of auto loans, credit card loans and corporate loans and increased the risk of a recession. Home sales have plummeted as a result.
The Fed’s latest move will further increase certain borrowing costs for households and businesses.
After a relatively quiet period for banks following crisis-level concerns in March, there was some turbulence again this week with the collapse of California-based lender First Republic
Inflation has fallen from a peak of 9.1 percent in June to 5 percent in March, but remains well above the Fed’s target of 2 percent
Still, the Fed’s statement offered little indication that its series of rate hikes has made significant progress toward its goal of cooling the economy, the job market and inflation.
“Job growth has been robust in recent months and the unemployment rate has remained low,” the statement said.
‘Inflation remains high.’
The rise in interest rates contributed to the collapse of three major banks and turmoil in the banking sector. In addition to First Republic, California-based Silicon Valley Bank and Signature Bank of New York filed for bankruptcy in March.
All three failed banks had bought long-term bonds that paid low interest and then quickly lost value when the Fed raised rates.
The banking turmoil may have played a role in the Fed’s decision Wednesday to consider a pause.
Chairman Jerome Powell had said in March that a reduction in bank lending to strengthen their finances could act as the equivalent of a quarter-point rate hike to slow the economy.
Fed economists estimate that tighter lending due to bank failures will contribute to a “mild recession” later this year, increasing pressure on the central bank to suspend rate hikes.
The Fed is also now grappling with the threat of a long-term stalemate over the country’s borrowing limit, which limits the amount of debt the government can issue.
Congressional Republicans are demanding big cuts as the price of lifting the country’s borrowing limit.
The Fed’s decision on Wednesday came against an increasingly cloudy background.
The economy appears to be cooling, with consumer spending flat in February and March, indicating that many customers have become cautious in the face of higher prices and borrowing costs. Production is also weakening.
US job creation slowed again last month, with employers adding 236,000 workers
The unemployment rate fell back to 3.5 percent in March, near its six-decade low, from 3.6 percent in February
Even the surprisingly resilient labor market, which has held the unemployment rate near its 50-year low for months, is showing cracks.
Hiring has slowed, the number of job openings has fallen, and fewer people are leaving their jobs for other, generally better-paying positions.
The turmoil in the country’s banking sector, which erupted again last weekend when regulators seized and sold First Republic Bank, has added pressure on the economy.
Investors have become concerned about whether other regional banks could experience similar problems.
Goldman Sachs estimates that a widespread slump in bank lending could reduce US growth by 0.4 percentage points this year. That could be enough to trigger a recession. In December, the Fed forecast growth of just 0.5 percent in 2023.