The Federal Reserve on Wednesday approved its 10th interest rate hike in just over a year and hinted that the current tightening cycle is coming to an end.
In a unanimous decision widely expected by markets, the central bank’s Federal Open Market Committee raised its benchmark borrowing rate by 0.25 percentage points. The rate sets what the banks charge each other for overnight loans, but powers many consumer debt products such as mortgages, car loans and credit cards.
The increase takes the federal funds rate to a target range of 5% to 5.25%, the highest since August 2007.
Markets, however, are more focused on where the Fed will go from here, especially amid concerns over economic growth and a lingering banking crisis that has rattled Wall Street’s nerves.
THE statement after the meeting offered only a certain clarity, and not by what it said but by what it did not say.
The document omitted a sentence from the previous statement that “the Committee expects that additional policy tightening may be appropriate” for the Fed to meet its 2% inflation target.
Additionally, the statement changed language to describe the conditions under which “further strengthening of the policy may be appropriate.” Previously, the FOMC had framed forward guidance on how it would determine “the extent of future increases in the target range.”
The press release recalls that the Fed “will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments”.
Taken together, these moves are at least a tenuous nod that while tight policy could remain in place, the path ahead is less clear for real interest rate hikes as policymakers assess incoming data and trends. financial conditions.
Wednesday’s move comes amid US economic fragility and despite objections from prominent Democratic lawmakers, who urged the Fed this week to halt rate hikes they say could trigger a recession and job losses. excessive.
However, the labor market has remained strong since increases began in March 2022. At the same time, inflation is still well above the 2% target that policymakers consider optimal. Several officials have said rates will likely have to stay high even if increases are suspended.
Along with inflation, the Fed had to contend with an uproar in the banking sector which saw the closure of three mid-sized banks.
Although central bank officials insist that the sector as a whole is stable, the expected tightening of credit conditions and tighter regulations ahead are expected to weigh further on economic growth which was only 1, 1% annualized in the first quarter.
The post-meeting statement noted that “tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring and inflation.” The language was similar to the March statement, which came just after the collapse of Silicon Valley Bank and Signature Bank.
The Fed’s own economists at the March FOMC meeting warned that a shallow recession is likely due to banking problems.
The statement from this week’s meeting reiterated that economic growth has been “modest” while “jobs gains have been robust” and inflation is “high”.
While higher rates have added to banking problems, Fed officials insist they are focusing squarely on inflation. Recent data points have indicated a slowdown in price increases, although “sticky” items such as housing costs and medical care have remained higher, while prices that tend to change a lot, such as food and energy, have actually slowed down, according to the Atlanta Fed. calculations.
Markets expect slowing growth and the possibility of a recession to force the Fed to cut rates later this year.
Manufacturing has been in contraction for six months, according to a gauge from the Institute for Supply Management. However, the service sector, which accounts for a larger share of the $26.5 trillion US economy, is pointing to expansion.
The labor market also remained resilient. Payroll processing company ADP reported on Wednesday that hiring by private sector companies increased by 296,000 in April, well ahead of economists’ expectations. This served as a potential signal that despite the Fed’s best efforts to cool the employment situation and correct an imbalance between supply and demand, problems remain.