Fed: quarter-point rate hike; ‘banking system is sound’
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 upheaval stemming from the fall 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 streak of rate hikes.
In its statement, it removed language that had previously said it would keep raising rates at future meetings. The statement now says “some additional policy firming may be appropriate” — a weaker commitment to future hikes.
In its latest quarterly projections, the policymakers forecast that they expect to raise their key rate just once more — from its new level of about 4.9% to 5.1%, the same peak they projected in December.
Still, the Fed’s statement included some language that indicated that its inflation fight remains far from complete. It noted that “inflation remains elevated,” and it removed a phrase, “inflation has eased somewhat,” that was in its statement in February.
Speaking at a news conference, Chair Jerome Powell said, “The process of getting inflation back down to 2% has a long way to go and is likely to be bumpy.”
Despite the Fed’s projection that it will impose only one more rate hike, Powell said the central bank may still choose to carry out additional hikes if inflation remained chronically high.
Powell acknowledged that some banks may reduce their pace of lending at a time of high anxiety in the financial system. Any such pullback in lending, he said, could slow the economy and possibly act as the equivalent of an additional quarter-point rate hike.
“Events in the banking system over the past two weeks are likely to result in tighter credit conditions for households and businesses,” the Fed chair said. “It is too soon to determine the extent of these effects and therefore too soon” for the Fed to know how or whether its plans for interest rates might be affected.
Stock market reaction
Stocks fell sharply Wednesday after the Federal Reserve indicated the end may be near for its economy-crunching hikes to interest rates, but it also doesn’t expect to cut rates anytime soon despite Wall Street’s hopes.
The S&P 500 fell 1.6% for its first drop in three days. The Dow Jones Industrial Average lost 530 points, or 1.6%, while the Nasdaq composite dropped 1.6%.
Some of the sharpest drops came again from the banking industry, where investors are worried about the possibility of customers yanking their cash to cause more collapses.
They slid after Treasury Secretary Janet Yellen said she’s not considering blanket protection for all depositors at all banks, unless they present a risk to the overall system.
Stocks had been little changed for much of the day, before the Fed announcement. The move was exactly what Wall Street was expecting.
Economic “indicators are still pretty resilient,” said Sameer Samana, senior global market strategist for Wells Fargo Investment Institute. “For markets to still speculate on rate cuts, it’s probably not going to take place this year if the Fed has its way.”
“There were a good dozen or so instances where he kept bringing it back to inflation. For better or worse, he was pretty consistent.