The US Federal Reserve votes to raise interest rates to a maximum of 16 years

The US Federal Reserve voted to raise interest rates to a 16-year high on Wednesday, even as a banking crisis has left the economy reeling.

The quarter-point increase in the Fed’s benchmark interest rate was the 10th increase since March 2022, when interest rates were zero and the Fed began its rapid-fire anti-inflation campaign. The interest rate now stands at 5% to 5.25%.

Fed Chairman Jerome Powell has consistently argued that the central bank should prioritize reducing inflation, which hit a 40-year high in the wake of the Covid-19 pandemic.

In a statement, the Fed said the banking system was “sound and resilient.”

“Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring and inflation. The extent of these effects remains uncertain. The committee remains very attentive to inflation risks,” the Fed said.

The statement hinted that the Fed’s rate hikes, the fastest in 40 years, may be coming to an end. The statement cut a sentence that suggested additional increases that were included in its latest rate hike announcement might be appropriate.

In March, the annual inflation rate was 5%, down from its peak of 9.1% in June and its lowest rate since 2021. Inflation has been declining steadily over the past several months but remains well below above the Federal Reserve’s target rate of 2%.

Although headline inflation has been cooling in recent months, much of the decline was seen in the volatile energy sector, which saw price spikes a year ago after Russia’s invasion of Ukraine.

Core inflation, which excludes the more volatile energy and food prices, rose slightly in March as house prices rose 8.2% over the past year. Fed officials have likely been paying attention to that issue along with signs that the job market remains strong. In March, 236,000 jobs were incorporated into the labor market.

But there have been signs that the economy is starting to cool. Consumer spending has stalled and US manufacturing hit a nearly three-year low in March after years of growth in the wake of the pandemic.

This is the fourth quarter-point hike, making it one of the smallest increases after the Fed raised four consecutive three-quarter-point hikes in the summer and fell as interest rates hit highs in the 40s. years.

Still, some expected the Fed to halt its series of hikes at its last board meeting in March, which took place just two weeks after the Silicon Valley Bank (SVB) collapse. Although the Fed was seeking a half-point hike, it raised rates by a quarter point, interpreted as an acknowledgment that the banking crisis could also negatively affect the economy.

This week, First Republic became the latest mid-size US bank to collapse after worried depositors withdrew $100 billion in funds.

But despite the banking crisis, over the past several weeks several Fed staffers have publicly suggested that at least one more rate hike, and perhaps more, is on the table.

“I would welcome signs of moderation in demand, but until they show up and I see inflation move significantly and persistently toward our 2% target, I still believe there is work to be done,” Fed Governor Christopher Waller said. , who votes on raising interest rates. , in a speech in April.

It’s unclear if the Fed will stop or change going forward, as officials will continue to closely watch key economic data for signs of an economic slowdown.

Leave a Comment