Stabroek News

Fed raises rates, opens door to pause in tightening cycle

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The Federal Reserve moved its management of the post-pandemic economic recovery into a new phase on Wednesday with what may be the last in a historic series of interest rate hikes and heightened attention to credit and other economic risks.

The U.S. central bank raised its benchmark overnight interest rate by a quarter of a percentage point to the 5.00%-5.25% range, as expected by financial markets, but in doing so dropped from its policy statement language saying that it “anticipate­s” further rate increases would be needed.

The change doesn’t foreclose the central bank’s policy-setting committee from hiking rates again when it meets in June, but Fed Chair Jerome Powell said it was now an open question whether further increases will be warranted in an economy still facing high inflation, but also showing signs of a slowdown and with risks of a tough credit crackdown by banks on the horizon.

“We’re closer, or maybe even there,” Powell said of the endpoint of rate increases that have boosted the Fed’s policy rate by a full 5 percentage points in the 10 meetings since March 2022, a torrid pace for the central bank and one that may now warrant allowing some time for the impact to be felt in full.

Using language reminiscen­t of when it halted its tightening cycle in 2006, the Fed said that “in determinin­g the extent to which additional policy firming may be appropriat­e,” officials would take into account how the impact of monetary policy was accumulati­ng in the economy.

Top of mind: inflation and the impact of a credit tightening Fed officials feel is still evolving in the wake of both higher interest rates and a financial sector rattled by the recent failure of three U.S. banks.

At a press conference following the release of the statement, Powell said inflation remains the chief concern, and that it is therefore too soon to say with certainty that the rate-hike cycle is over.

“We are prepared to do more” he said, with policy decisions from June onward to be made on a “meeting-by-meeting” basis.

He also pushed back on market expectatio­ns that the policysett­ing Federal Open Market Committee would cut rates this year, saying such a move was unlikely.

“We on the committee have a view that inflation is going to come down not so quickly, it will take some time,” he told reporters, and “in that world, if that forecast is broadly right, it would not be appropriat­e to cut rates” this year.

Powell, however, agreed “policy is tight,” and said that makes it possible the central bank has

done enough with rates, particular­ly given the developing strains in the economy, the possibilit­y that credit tightening by banks may slow the economy more than expected, and a remaining Fed hope that a recession can be avoided.

The Fed’s policy rate is now roughly the same as it was on the

eve of a destabiliz­ing financial crisis 16 years ago, and is at the level which a majority of Fed officials projected in March would in fact be “sufficient­ly restrictiv­e” to return inflation to the central bank’s 2% target. Inflation is currently still more than twice that target.

 ?? ?? Federal Reserve Chairman Jerome Powell arrives to hold a news conference after the release of U.S. Fed policy decision on interest rates, in Washington, U.S, May 3, 2023. (Reuters photo)
Federal Reserve Chairman Jerome Powell arrives to hold a news conference after the release of U.S. Fed policy decision on interest rates, in Washington, U.S, May 3, 2023. (Reuters photo)

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