The Federal Reserve strengthened its fight against high inflation on Wednesday by raising its key rate by a quarter of a point to the highest level in 16 years. But the Fed also signaled it may now pause the streak of 10 rate hikes that have made borrowing for consumers and businesses increasingly expensive.
In a statement after its last policy meeting, the Fed deleted a previous sentence that said “a few more rate hikes” might be needed. future hikes may be needed.
Fed rate hikes over the past 14 months have more than doubled mortgage rates, raised the costs of auto loans, credit card borrowings and business loans, and increased the risk of recession. Home sales have plunged as a result. The Fed’s latest move, which raised its benchmark rate to around 5.1%, could further increase borrowing costs.
Still, the Fed’s statement provided little indication that its series of rate hikes made significant progress toward its goal of cooling the economy, labor market and inflation. Inflation fell from a high of 9.1% in June to 5% in March, but remains well above the Fed’s target rate of 2%.
“Jobs gains have been robust in recent months and the unemployment rate has remained low,” the statement said. “Inflation remains high.”
Soaring rates contributed to the collapse of three major banks and turmoil in the banking sector. The three bankrupt banks had bought long-term bonds that paid low rates, then quickly lost value as the Fed raised rates.
The banking shake-up may have played a role in the Fed’s decision on Wednesday to consider a pause. Chairman Jerome Powell said in March that a cut in bank lending, to shore up their finances, could act as the equivalent of a quarter-point rate hike by slowing the economy.
Fed economists have estimated that the credit crunch resulting from bank failures will contribute to a “mild recession” later this year, increasing pressure on the central bank to halt rate hikes.
The Fed is also grappling with the threat of a prolonged standoff over the country’s borrowing limit, which caps the amount of debt the government can issue. Congressional Republicans are demanding deep spending cuts as the price for agreeing to lift the nation’s borrowing limit.
The Fed’s decision on Wednesday came against an increasingly cloudy backdrop. The economy appears to be calming, with consumer spending flat in February and March, indicating that many buyers have become cautious about rising prices and borrowing costs. Manufacturing, too, is weakening.
Even the surprisingly resilient labor market, which has kept the unemployment rate near 50-year lows for months, is showing cracks. Hiring has slowed, job openings have dwindled, and fewer people are leaving their jobs for other, usually higher-paying positions.
Turmoil in the country’s banking sector, which resurfaced last weekend when regulators seized and sold First Republic Bank, has intensified pressure on the economy. It was the second-largest U.S. bank failure and the third major bank meltdown in the past six weeks. Investors worried about whether other regional banks might suffer from similar problems.
Goldman Sachs estimates that a general decline in bank lending could reduce US growth by 0.4 percentage points this year. That could be enough to trigger a recession. In December, the Fed predicted growth of just 0.5% in 2023.
Wall Street traders were also angered by Treasury Secretary Janet Yellen’s announcement this week that the nation could default on its debt as early as June 1 unless Congress agrees to lift the limit on debt. debt, which caps the amount the government can borrow. A very first default on US debt could potentially lead to a global financial crisis.
The Fed’s rate hike on Wednesday comes as other major central banks are also tightening credit. European Central Bank President Christine Lagarde is expected to announce another interest rate hike on Thursday, after inflation figures released on Tuesday showed price increases had risen in the past month.
Consumer prices rose 7% in the 20 countries that use the euro in April from a year earlier, compared with a 6.9% year-on-year increase in March.
In the United States, some of the main drivers of price increases have stagnated or started to reverse, leading to a slowdown in headline inflation. The consumer price index rose 5% in March from a year earlier, well below its peak of 9.1% in June.
Rising rental costs have eased as more newly built apartments come online. Gas and energy prices have fallen steadily. Food costs are moderating. Supply chain issues no longer block trade, reducing the cost of new and used cars, furniture, and appliances.
Yet while headline inflation has slowed, “core” inflation – which excludes volatility in food and energy prices – has remained chronically high. According to the Fed’s preferred measure, underlying prices rose 4.6% in March from a year earlier, only slightly better than the 4.7% reached in July.
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(This story has not been edited by News18 staff and is published from a syndicated news agency feed)