The Federal Reserve has announced a 0.25% increase in its benchmark interest rate, raising it to a new range of 5%-5.25%. The decision was unanimous among the voting members of the Federal Reserve Open Market Committee (FOMC), the Fed committee that decides on policy. This move marks the central bank’s most aggressive rate-hiking campaign since the 1980s, with rates having increased by 5 percentage points since March 2022.
The Inflation Concerns
The Federal Reserve’s decision comes amidst concerns over inflation, with officials still viewing it as elevated. However, the bank has left its options open on future rate hikes, saying that these will be contingent on the impact of previous rate hikes on the economy and financial developments. The Fed’s statement notes that tighter credit conditions for households and businesses are likely to weigh on the economy, hiring, and inflation, although the extent of these effects remains uncertain.
Fed raises interest rates 0.25% in an attempt to tame inflation
Importance of Flexibility
Federal Reserve Chair Jay Powell, in his press conference on Wednesday, stressed the importance of remaining flexible on future policy decisions, saying: “A decision on a pause was not made today.” Powell did indicate that among members of the FOMC, “there’s a sense that we’re…much closer to the end of this than the beginning.”
Economist Jay Bryson of Wells Fargo suggested that the Fed’s decision could be considered a “hawkish pause.” However, the decision to hike rates further will depend crucially on incoming data over the next six weeks.
Powell also discussed the ongoing bank crisis, with the FDIC having brokered a sale of First Republic (FRC) to JPMorgan (JPM) last week. He noted that “conditions in that sector have broadly improved since early March, and the US banking system is sound and resilient.”
A shift in financial policy
The Fed’s decision to raise interest rates marks a significant shift in monetary policy, with the bank having replaced its framing from March with new language that considers the extent to which additional policy firming may be appropriate. The Fed noted that future rate hikes will be determined by a range of factors, including the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.