The Federal Reserve (Fed) raised its key federal funds rate to 5% to 5.25% range. It is the 10th consecutive increase. The rates are now at highest level since 2007. The hike completes the fastest series of rate increases since the 1980s, as the central bank works to cool the economy and greatly reduce the pace of inflation, which also reached highs not seen in decades.
The 25 bps hike was widely expected by Wall Street, as the macroeconomic policy crafters have yet to break the labor market and inflation levels are still considered elevated at 5%, far above the 2% target. In a statement after a two-day meeting, the central bank removed previous guidance that “some additional policy firming (rate hikes) may be appropriate” to lower yearly inflation to its 2% target. Instead, it said its policymaking committee “will closely monitor incoming information and assess the implications for monetary policy.
“In determining the extent to which additional policy firming may be appropriate to return inflation to 2% over time, the Committee will take into account” its rate hikes so far, the lags with which they affect the economy and inflation, and “economic and financial developments.”
During Wednesday’s news conference, Chairman Jerome Powell said “a decision on a pause was not made today” but noted the change in the statement language around future policy firming was “meaningful.”
The post-meeting statement had only offered some clarity on the future pace of rate hikes — and not by what it said but what it didn’t say. The document omitted a sentence present in the previous statement saying that “the Committee anticipates that some additional policy firming may be appropriate” for the Fed to achieve its 2% inflation goal.
The statement also tweaked language to outline the conditions under which “additional policy firming may be appropriate.” Previously, the FOMC had framed the forward guidance around how it would determine “the extent of future increases in the target range.”
The statement reiterated 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, the moves are at least a tenuous nod that while tight policy could remain in effect, the path ahead is less clear for actual interest rate hikes as policymakers assess incoming data and financial conditions.
‘Tighter’ credit for households
Wednesday’s decision comes amid U.S. economic fragility and over the objections of prominent Democratic lawmakers, who urged the Fed this week to stop rate hikes that they insisted could cause a recession and excessive loss of jobs.
However, the labor market has remained strong since the increases started in March 2022. At the same time, inflation is still well above the 2% target that policymakers consider optimum. Multiple officials have said rates probably will need to stay elevated even if the hikes are put on hold.
“Inflation has moderated somewhat since the middle of last year, nonetheless inflation pressures continue to run high and the process of getting inflation back down to 2% has a long way to go,” Powell told reporters.
Higher rates added to banking issues
While higher rates have compounded the banking problems, Fed officials insist they are focused squarely on inflation.
Recent data points have indicated a softening in price increases, though “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, actually have decelerated, according to Atlanta Fed calculations.
Markets are anticipating that slower growth and the possibility of recession will force the Fed to cut rates later this year.
Manufacturing has been in a contraction for the past six months, according to an Institute for Supply Management gauge. However, the services sector, which entails a broader slice of the $26.5 trillion U.S. economy, has been pointing to expansion.
The labor market also has remained resilient. Payroll processing firm ADP reported Wednesday that hiring by private sector companies increased by 296,000 in April, well ahead of economists’ expectations. That served as a potential signal that for all the Fed’s efforts to cool demand for labor and correct a supply-demand imbalance, issues remain.
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