To stabilize prices, the US central bank has raised interest rates to their highest level in 16 years.
The Federal Reserve raised its benchmark interest rate by 0.25 percentage points, marking its tenth increase in fourteen months.
The Fed indicated that Wednesday’s increase may be its last for the time being.
Its benchmark rate is now between 5% and 5.25 percent, up from near zero in March 2022.
Higher rates have significantly increased borrowing costs in the world’s largest economy, causing a slowdown in sectors like the housing market and contributing to the recent failures of three US banks.
Jerome Powell, chairman of the Federal Reserve, stated at a press conference following the announcement, referring to this as a “significant change,” “We no longer anticipate” additional interest rate hikes.
Nevertheless, he refused to rule out further action, stating, “We’ll be driven by incoming data.”
The bank began aggressively raising interest rates last year when prices in the United States were rising at the quickest rate in decades.
Global central banks, including those in the United Kingdom and Europe, have adopted comparable measures.
Higher interest rates increase the cost of purchasing a property, borrowing to expand a business, and incurring other debt. Officials anticipate that by increasing these costs, demand will decline and prices will moderate.
Since the Fed’s campaign began, price increases in the United States have shown symptoms of moderating.
In March, the inflation rate was 5%, the lowest level in nearly two years, but still excessively high for the Fed, which is targeting a 2% inflation rate.
Gregory Daco, the chief economist at EY-Parthenon, opined that the Fed would be “prudent” to pause now, given that the risks to the economy are mounting as economic activity slows.
“The fear of a recession is prevalent in today’s economy,” he said. “I do not believe the inflation war is over, but we are experiencing gradual disinflation and are also in an environment where interest rates are high and elevated, which should constrain business activity and lead to further disinflation in the coming months,” says the author.
Bill Taubman, the president of the New York-based family-owned business Ball Chain Manufacturing, reports that consumers have become more cautious in recent months due to economic concerns. In response to still-rising prices, his company has also reduced its replenishment efforts.
However, he stated that his company had no immediate borrowing requirements and that he remained optimistic that any slowdown would be mild and relatively brief.
“We recognize there is some market softness due to inflation and, of course, interest rate issues,” he said. Long-term, however, we are optimistic.
Mr. Powell stated that the recent bank failures and resulting anticipated reduction in lending are likely to impact the economy.
He added, however, that he remained optimistic that the United States would avoid a recession, noting that hiring has remained robust and unemployment has remained low.
“I continue to believe it is feasible…This time is very different,” he declared.
Wednesday’s decision by the Federal Reserve to raise interest rates was unanimous and widely anticipated by financial markets, which are searching for hints about the bank’s future actions.
In a written statement, the bank rescinded its previous March guidance that “additional policy tightening may be necessary” to bring inflation under control.
During the press conference, Mr. Powell stated that the Fed was “getting close or maybe even there” in terms of halting its rate-hike campaign, but was willing to take further action if necessary.
Depending on what transpires in the coming months, according to Whitney Watson, global co-head of fixed income and liquidity solutions at Goldman Sachs Asset Management, the Fed could still raise interest rates.
“Inflation is trending in the right direction, but progress has been bumpy,” she stated. Therefore, a pause in rate actions is prudent, but further tightening is plausible if inflation proves persistent.
