Fed hikes interest rates for 10th time in a row and signals potential pause

MARKET WATCH

The Federal Reserve on Wednesday raised a key interest rate again, but it also signaled it was ready to pause and said further monetary tightening would depend on how inflation and the economy respond to sharply higher borrowing costs.

The quarter percentage point increase in the Fed’s benchmark interest rate put it in a range of 5%-5.25%, up from near zero just a little over a year ago. That’s the highest level since the Great Recession of 2008.

The Fed also reworked the language in its post-meeting statement, scrapping a line saying that “some” additional hikes “may” be needed.

Instead, the Fed said its actions would be dictated by “the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

The dovish tone of the new language suggests the Fed would take a more finely tuned approach at future meetings.

Talk about “cumulative monetary tightening” and “policy lags” have mainly been the talking points of officials who are more worried about the growth of the economy than the level of inflation.

Yet the latest rate hike could very well be the last of the current cycle. Powell himself suggested interest rates could be restrictive enough to do the job in getting inflation back down to pre-pandemic levels.

The Fed’s own projections signal that the range of 5%-5.25% would be a good place to pause. While some officials advocate more hikes, only a minority of Fed watchers are forecasting more tightening.

“The Fed made what is very likely the last quarter percentage point rate hike of the cycle,” said chief economist Bill Adams of Comerica Bank.

At the same time, the Fed is continuing its so-called “quantitative tightening”  plan to slowly let its balance sheet shrink.

Today’s move was the tenth straight meeting with an interest rate rise as the Fed battles high inflation sparked by government spending and supply disruptions during the pandemic.

The fast pace of tightening — the quickest in 40 years — has shaken the banking system and led to the collapse of three of the country’s  major banks. 

Economists and Fed officials think the bank sector troubles will slow lending and hurt U.S. growth, adding to the pressure on the economy from the Fed rate hikes.

Just two months ago, the Fed’s staff forecast a mild recession beginning later this year.

Powell, for his part, said he did not agree.

“This is not my own, most likely case,” he said. The Fed chairman said he thought the economy would slow this year but keep expanding.