- Central bank raises interest rates by a quarter of a percentage point
- Benchmark overnight rate now in the 5.00% to 5.25% range
- According to Powell, the Fed still sees inflation as too high
WASHINGTON, May 3 (Reuters) – The Federal Reserve on Wednesday shifted its management of the post-pandemic economic recovery into a new phase, with what may be the latest in a historic series of rate hikes and heightened attention to credit and other economic risks .
The US Federal Reserve raised its benchmark federal funds rate by a quarter of a percentage point to the 5.00% to 5.25% range in line with financial markets expectations, but deviated from its policy statement by saying it would add another interest rate ” expected”. increases would be necessary.
The change doesn’t stop the central bank’s monetary policy committee from raising rates again at its June meeting, but Fed Chair Jerome Powell said it was now an open question whether further hikes were warranted in an economy still struggling with high rates Inflation is facing, but also signs of slowing and risks of a bank crackdown on the horizon.
“We’re closer, or maybe even there,” Powell said of the endpoint of rate hikes that have lifted the Fed’s benchmark rate a full 5 percentage points in the 10 meetings since March 2022, a blistering pace for the central bank and one that justifies it now may allow some time for the full effects to be felt.
Using language reminiscent of the end of its tightening cycle in 2006, the Fed said that “in determining the extent to which additional monetary tightening might be appropriate,” officials would consider how the impact of the monetary policy on the economy accumulated.
Top of mind: Inflation and the impact of a credit crunch Fed officials believe they are moving ahead in the wake of both higher interest rates and a financial sector rocked by the recent collapse of three US banks.
At a news conference following the release of the statement, Powell said inflation remained the top concern and it was too early to say with certainty that the cycle of interest rate hikes was over.
“We are ready to do more,” he said, with policy decisions to be taken on a “meeting-by-meeting” basis from June.
He also pushed back market expectations that the policy-making Federal Open Market Committee would cut rates this year, saying such a move was unlikely.
“We in the committee believe that inflation will not go down anytime soon, it will take time,” he told reporters, and “in this world, it would not be appropriate to bring down inflation if this forecast is broadly correct.” Correct is prices” this year.
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‘SOFT LANDING’
Powell agreed, however, that the “policy is tight” and said it allows the central bank to have done enough with interest rates, especially given the evolving tensions in the economy, the possibility that the banks’ credit crunch may worsen slow down the economy more than expected. and a surviving Fed hoping a recession can be avoided.
The Fed’s policy rate is now roughly where it was on the eve of a destabilizing financial crisis 16 years ago, and at levels that a majority of Fed officials predicted in March would actually be “enough restrictive” to restart inflation the central bank’s 2% target. Inflation is currently still more than twice as high.
Economic growth remains modest, but “recent developments are likely to result in tighter credit conditions for households and businesses, weighing on economic activity, hiring and inflation,” the Fed said in its statement.
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Still, job gains “have been robust,” the Fed said, and Powell noted that some recent data on falling job vacancies and lower income growth coupled with historically low unemployment supported the idea that the economy was slowing without a dramatic rise in unemployment could.
“The case of avoiding a recession is more likely in my view than the case of having a recession,” Powell said.
Risks related to a standoff on the US debt limit between Congressional Republicans and Democratic President Joe Biden have fueled caution over attempts to further tighten financial conditions.
The Fed’s change in approach was reflected in US interest rate futures, which showed broad expectations that there would be no rate hikes at either of the next two central bank policy meetings.
US stocks initially held onto gains following the release of the Fed’s statement but fell later in the afternoon to close lower. US Treasury yields fell sharply as the dollar weakened against a basket of trading partner currencies.
“For me, the key was changing a single word, saying they believe they will determine whether future hikes are necessary, while last time they said they anticipate further rate hikes will be necessary,” said Sam Stovall, chief investment strategist at CFRA Research. “By using the word ‘determine’ instead of ‘anticipate,’ it is essentially telling the markets that the Fed is now on pause.”
Reporting by Howard Schneider; Edited by Paul Simao
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