Fed Raises Interest Rates by 0.25% Again

Federal Reserve Raises Interest Rates for 10th Time in Over a Year

The Federal Reserve has approved its 10th interest rate increase in just over a year, taking the fed funds rate to a target range of 5%-5.25%. The widely expected decision was unanimous, and the central bank dropped a tentative hint that the current tightening cycle is at an end. The rate sets what banks charge each other for overnight lending but feeds through to many consumer debt products such as mortgages, auto loans and credit cards.

What Does This Mean for the Economy?

Markets are more focused on whether the Fed will pause here, particularly with lingering concerns over economic growth and a banking crisis that has rattled nerves on Wall Street. Stocks rose slightly and Treasury yields were mostly lower immediately following the Fed news, but stocks struggled to hold on to the gains.

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 statement also tweaked language to outline the conditions under which “additional policy firming may be appropriate.”

What About Inflation?

The post-meeting statement omitted a sentence present in the central bank’s March comments saying that “the Committee anticipates that some additional policy firming may be appropriate” for the Fed to achieve its 2% inflation goal. 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.”

What’s Next?

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. Issues in the financial sector have continued, with JPMorgan Chase on Monday taking over First Republic. Powell said such a transaction was an “exception.” Although it wasn’t an ideal situation, Powell said it was a “good outcome” for the banking system.

What Does This Mean for Investors?

While higher rates have compounded the banking problems, Fed officials insist they are focused squarely on inflation. Markets are anticipating that slower growth and the possibility of recession will force the Fed to cut rates later this year. 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.