US Fed announces latest interest hike in wake of banking turmoil | Business and Economy News
The Fed has continued its cycle of rate hikes to curb inflation but has indicated a pause may be on the horizon.
The United States Federal Reserve has announced its latest rate hike, a measure aimed at bringing down inflation by making it more expensive for consumers to borrow.
Wednesday’s quarter-point hike puts the federal funds rate in the 4.75 to 5 percent range, its highest level in 15 years.
The rise was widely expected and underscores the Federal Reserve’s determination to contain inflation, which remains above policymakers’ long-term annual target of 2 percent.
But the rate hike follows the sudden collapses of Silicon Valley Bank (SVB) and Signature Bank this month. Critics blamed the Fed’s relentless rate hikes for contributing to the failures that were part of the biggest banking sector meltdown since the 2008 financial crisis, and some observers speculated that policymakers would be forced to postpone rate hikes.
Asked Wednesday whether such a pause had been considered for the last cycle, Federal Reserve Chair Jerome Powell said, “We have considered it.”
Still, Wednesday’s policy statement said the US banking system is “solid and resilient.” It added that the recent stress in the industry “is likely to result in tighter credit conditions for households and businesses, weighing on economic activity, hiring and inflation.”
The Fed also hinted that a pause in rate hikes could be on the horizon. The latest policy statement omitted the oft-repeated phrase that “sustained increases” in interest rates “will be appropriate”.
That phrase has been in every policy statement since March 16, 2022, when the Fed made its decision to raise interest rates to counteract inflation.
Now the language has become softer. On Wednesday, the policy-making Federal Open Market Committee instead said that “additional policy tightening may be appropriate.”
That leaves the chance of the Fed raising rates by another quarter of a point, perhaps at its next meeting in May, but it also suggests that the next rate hike could be a first stopping point for rate hikes.
Wednesday’s hike was the same size as the central bank’s previous interest rate decision in February.
The three major US stock indices, which were mostly sluggish prior to the Fed’s announcement, rose immediately afterwards as investors digested the hike and the accompanying statement.
Meanwhile, Powell said Wednesday that although recent strains on the banking system have made the outlook more uncertain, it’s still possible the economy won’t suffer a sharp downturn as the Fed works to curb inflation.
In terms of a soft landing for the economy, “there is a way to get there, and that way still exists,” Powell said.
Officials also forecast that the unemployment rate would end the year at 4.5 percent, slightly below the 4.6 percent seen in forecasts released in December. The outlook for economic growth also fell slightly to 0.4 percent from 0.5 percent in the previous projections.
Inflation is now seen at 3.3 percent at the end of the year, compared to 3.1 percent in the latest projections.