The Federal Reserve increased interest rates by a quarter of a percentage point on Wednesday, but it also signalled that it was about to halt further rises in borrowing costs due to recent market volatility brought on by the failure of two US banks.
With new estimates showing 10 of 18 Fed members still expect rates to climb another quarter of a percentage point by the end of this year, the same endpoint indicated in the December projections, the decision set the US central bank’s benchmark overnight interest rate in the 4.75%-5.00% range.
But, the Fed’s most recent policy statement no longer states that “ongoing rises” in rates will likely be appropriate, signalling a significant change brought on by the unexpected failures this month of Silicon Valley Bank (SVB) and Signature Bank. Since the decision to begin the rate-hike cycle on March 16, 2022, that language had been present in every policy statement.
However, the Federal Open Market Committee, which sets policy, only stated that “some additional policy firming may be needed,” leaving open the possibility that one more quarter-point rate increase, maybe at the Fed’s next meeting, might serve as at least an initial halt to the rate hikes.
Despite the fact that the US banking system was described as “sound and resilient” in the policy statement, it was also stated that recent stress in the banking industry is “likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation.”
No one disagreed with the policy choice.
The war against inflation was not assumed to have been won in the document. The phrase “has lessened” was removed from the revised statement and was replaced with the phrase “remains elevated.”
According to the Fed, job growth has been “strong.”
According to official estimates, the unemployment rate would conclude the year at 4.5%, which is somewhat lower than the 4.6% recorded as of December. The prognosis for economic growth also decreased significantly, from 0.5% to 0.4%. Inflation is now anticipated to reach 3.3% by the end of the year, up from 3.1% in previous predictions.
Compared to just two weeks ago, when Fed Chair Jerome Powell testified before Congress that higher-than-expected inflation would probably force the central bank to raise interest rates higher and possibly faster than expected, the outcome of the two-day meeting this week represents a sharp repositioning of the monetary authority’s strategy.
In addition to highlighting broader worries about the soundness of the banking system, the collapse of California-based SVB on March 10 and the subsequent collapse of New York-based Signature Bank increased the risk that future Fed rate increases could tip the economy towards a financial catastrophe.
At 2:30 p.m. EDT (1830 GMT), Powell will hold a news conference to discuss the policy choice and the Fed’s perspective on recent events.
