Rate hikes continue but could be ending

Federal Reserve’s latest increase is limited to a quarter-point amid tumult

WASHINGTON — The Federal Reserve extended its yearlong fight against high inflation Wednesday by raising its key interest rate by a quarter-point despite concerns that higher borrowing rates could worsen the turmoil that has gripped the banking system.

“The U.S. banking system is sound and resilient,” the Fed said in a statement after its latest policy meeting ended.

At the same time, the Fed warned that the financial upheaval stemming from the collapse of two major banks is “likely to result in tighter credit conditions” and “weigh on economic activity, hiring and inflation.”

The central bank also signaled that it’s likely nearing the end of its aggressive series of rate hikes. In a statement, it removed language that had previously indicated it would keep raising rates at upcoming meetings. The statement now says “some additional policy firming may be appropriate” — a weaker commitment to future hikes.

And in a series of quarterly projections, the Fed’s policymakers forecast that they expect to raise their key rate just one more time — from its new level Wednesday of about 4.9% to 5.1%, the same peak level they had projected in December.

Still, in its latest statement, the Fed included language that indicates its fight against inflation remains far from complete.

The latest rate hike suggests that Chair Jerome Powell is confident that the Fed can manage a dual challenge: Cool stillhigh inflation through higher loan rates while defusing turmoil in the banking sector through emergency lending programs and the Biden administration’s decision to cover uninsured deposits at the two failed U.S. banks.

The Fed’s signal that the end of its rate-hiking campaign is in sight may also soothe financial markets as they continue to digest the consequences of the U.S. banking turmoil and the takeover last weekend of Credit Suisse by its larger rival UBS.

The central bank’s benchmark shortterm rate has now reached its highest level in 16 years. The succession of Fed

rate hikes have also heightened the risk of a recession.

Early this month, Powell had told a Senate panel that the Fed was considering raising its rate by a substantial half-point. At the time, hiring and consumer spending had strengthened more than expected, and inflation data had been revised higher.

The troubles that suddenly erupted in the banking sector two weeks ago likely led to the Fed’s decision to raise its benchmark rate by a quarter-point rather than a half-point. Some economists have cautioned that even a quarter-point rise in the Fed’s key rate, on top of previous hikes, could imperil weaker banks whose customers may decide to withdraw significant deposits.

Silicon Valley Bank and Signature Bank were both brought down, indirectly, by higher rates, which pummeled the value of the Treasurys and other bonds they owned. As anxious depositors withdrew their money en masse, the banks had to sell the bonds at a loss to pay the depositors. They were unable to raise enough cash to do so.

But economists warn that many mid-size and small banks, in order to conserve capital, will likely become more cautious in their lending. A tightening of bank credit could, in turn, reduce business spending on new software, equipment and buildings. It could also make it harder for consumers to obtain auto or other loans.

Some economists worry that such a slowdown in lending could be enough to tip the economy into recession. Wall Street traders are betting that a weaker economy will force the Fed to start cutting rates this summer.

The Fed would likely welcome slower growth, which would help cool inflation. But few economists are sure what the effects would be of a pullback in bank lending.

Other major central banks are also seeking to tame high inflation without worsening the financial instability caused by the two U.S. bank collapses and the hasty sale of Credit Suisse to UBS. Even with the anxieties surrounding the global banking system, for instance, the Bank of England faces pressure to approve an 11th straight rate hike Thursday with annual inflation having reached 10.4%.

And the European Central Bank, saying Europe’s banking sector was resilient, last week raised its benchmark rate by a half point to combat inflation of 8.5%.