Fed raises interest rates by quarter point, signals potential break in tightening cycle

Indian and Global Economy

Fed raises interest rates by quarter point, signals potential break in tightening cycle.

The Federal Reserve on Wednesday raised interest rates by a quarter of a percentage point and signaled it may pause further increases, giving officials time to assess the fallout from recent bank failures, wait on the resolution of a political standoff over the U.S. debt ceiling, and monitor the course of inflation.

The unanimous decision lifted the U.S. central bank’s benchmark overnight interest rate to the 5.00 percent-5.25 percent range, the Fed’s tenth consecutive increase since March 2022.

But the accompanying policy statement dropped language saying that its rate-setting Federal Open Market Committee still “anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.”

In its place the Fed inserted a more qualified statement, reminiscent of language used when it halted rate hikes in 2006, which says that “in determining the extent to which additional policy firming may be appropriate,” officials will study how the economy, inflation and financial markets behave in the coming weeks and months.
The new language does not guarantee the Fed will hold rates steady at its next policy meeting in June, and the statement noted that “inflation remains elevated,” and job gains are still “running at a robust pace.”

But 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 target. It is currently still more than twice that level.

Economic growth remains modest, but “recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring and inflation,” the Fed said.
Risks around the recent failures of several U.S. banks and a debt limit standoff between Republicans in Congress and Democratic President Joe Biden have added to the Fed’s sense of caution about trying to tighten financial conditions further.

Fed Chair Jerome Powell will hold a press conference at 2:30 p.m. EDT (1830 GMT) to elaborate on the outcome of the latest two-day policy meeting.


10 points.

  1. FOMC hikes by 25 bps to 5.0-5.25%
  2. Statement language no longer “anticipates” that rate hikes may be appropriate
  3. Changes in statement reflects desire to want to retain optionality to hike, but not commit to them
  4. Statement dropped reference to the need to get policy “sufficiently restrictive”
  5. In the presser, Powell said assessment of sufficiently restrictive was “ongoing” & something they’ll revisit at next meeting
  6. Powell said a few times that “policy is tight” and added that real rates are “meaningfully above” estimates of neutral rates
  7. Towards the end of presser, he said: “we’re getting close [to the end] or maybe even there”
  8. To be clear, Chair Powell (earlier) in the presser, did clarify that the statement change does not imply that the Fed has decided to pause hikes, but rather that decisions will be made on a meeting-by-meeting basis
  9. Powell also softly pushed back on pricing of near-term cuts by suggesting that if inflation evolves as Fed officials expect, cuts won’t be warranted
  10. Powell expressed confidence in the safety and soundness of the banking system, while still highlighting that credit tightening is a headwind to growth and might do some of the work that had been envisioned to be done through higher policy rates

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