Federal Reserve Hikes Interest Rates as Inflation Persists

WASHINGTON (Reuters)—The Federal Reserve on Wednesday raised interest rates by a quarter of a percentage point, but indicated it was on the verge of pausing further increases in borrowing costs amid recent turmoil in financial markets spurred by the collapse of two U.S. banks.

This move established the benchmark overnight interest rate for the U.S. central banks at 4.75%-5.00%. Updated projections show that 10 of 18 Fed policymakers expect rates to rise another quarter-point by 2023. This is the same endpoint as the December projections. However, there are uncertainties about how tighter financial conditions might impact a strong labor market, and the current resilient pace of inflation.

The Fed’s most recent policy statement does not state that, in a significant shift triggered by the unexpected failures of Signature Bank and Silicon Valley Bank (SVB). “ongoing increases” In rates will likely be appropriate. This language has been used in every policy statement since March 16, 2022, when the rate hike cycle was initiated.

Jerome Powell, Fed Chair, opened his post-meeting conference with remarks about the recent banking crisis. He wanted to reassure consumers, depositors and businesses that the system is sound following the spate of actions taken by the central bank and other regulators in the past two weeks.

“These actions demonstrate that all depositors’ savings in the banking system are safe,” Powell stated.

However, the Fed chief spoke out to say that Fed officials are still in good hands. “are prepared to use all of our tools as needed to keep it safe and sound.”

However, the turmoil will likely take a toll upon growth and the economic outlook. Recent events are likely to lead to tighter credit conditions for both households and businesses.

Powell stated that it was too early to know the effects of these effects and suggested that a rate increase be considered at the meeting. However, he did not want to say otherwise. “ongoing” Rate increases were justified.

After the release of this statement, yields on Treasury securities fell. The 2-year Treasury note yield, which is sensitive to Fed rates expectations, fell more than 20 basis points during the session.

U.S. stocks, which initially surged after the release of the policy statement, headed lower as Powell spoke, with the benchmark S&P 500 index down about 0.25% in late afternoon trading. The dollar fell against a group of major trading partners currencies.

“The Fed has been spooked by Silicon Valley Bank and other banking turmoil. They certainly point to that as a potential depressant on inflation, perhaps helping them do their job without having to raise rates as aggressively,” said Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder.

Only that was the policy-setting Federal Open Market Committee’s statement “some additional policy firming may be appropriate,” leaving open the chance that one more quarter-of-a-percentage-point rate increase, perhaps at the Fed’s next meeting, would represent at least an initial stopping point for the hiking cycle.

Although the policy statement stated that the U.S. banking sector is “sound and resilient,” It also pointed out that the recent stress in banking has been “likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation.”

There were no dissenting opinions on the policy decision.

ELEVATED INFLUENCE

The policy statement didn’t presuppose that the fight against inflation was won. The new statement no longer stated that inflation was a problem. “has eased” It was replaced with the declaration that inflation “remains elevated.”

These are the job gains “robust,” According to the Fed.

Officials forecasted that the unemployment rate would finish the year at 4.5%. This is slightly less than the December projections which showed 4.6%. However, the outlook for economic expansion fell to 0.4% from 0.5%. According to the latest projections, inflation is expected to end at 3.3% in 2019, compared with 3.1% in the previous projections.

The recent outcome of the two-day policy conference marks an abrupt repositioning by the central banks strategy. It was only two weeks ago that Powell testified before Congress about how a hotter than expected inflation would likely prompt the central banking to raise interest rates faster than anticipated and perhaps higher.

The March 10th collapse of California-based SVB, followed by the collapse of Signature Bank in New York raised concerns about the overall health of the banking sector and raised the possibility of further Fed rate hikes leading to a financial crisis.