The Federal Reserve raised interest rates, opening the door to a pause in the tightening cycle

WASHINGTON (Reuters) – The Federal Reserve moved its management of the post-pandemic economic recovery into a new phase on Wednesday in what could be the last in a historic series of interest rate hikes and heightened interest in credit and other economic risks. .

The US central bank raised its benchmark interest rate by a quarter of a percentage point to a range of 5.00%-5.25%, as expected by financial markets, but in doing so eased the language of its policy statement saying it “expects” an additional rate. Increases will be required.

The change does not prevent the central bank’s policy-setting committee from raising interest rates again when it meets in June, but Fed Chairman Jerome Powell said the question now was whether further increases were warranted in an economy still facing high inflation, but emerging Also, signs of a slowdown and risks of a credit crackdown by banks loom on the horizon.

“We’re closer, or maybe there,” Powell said of the endpoint of interest rate hikes that have boosted the Fed’s policy rate by a full 5 percentage points in the 10 meetings since March 2022, a challenging pace for the central bank. Which may now require allowing some time to take full effect.

Using language reminiscent of when it halted the tightening cycle in 2006, the Fed said that “in determining the extent to which additional policy anchoring may be appropriate,” officials will take into account how the impact of monetary policy accumulates in the economy.

Top of mind: Inflation and the impact of credit tightening that Fed officials are feeling is still developing in the wake of rising interest rates and the financial sector affected by the recent failure of three US banks.

In a press conference following the release of the statement, Powell said that inflation remains the primary concern and therefore it is too early to say with certainty that the rate hike cycle is over.

“We are prepared to do more,” he said, with policy decisions made from June onward on a “meeting-by-meeting” basis.

He also backed away from market expectations that the policy-setting Federal Open Market Committee would cut interest rates this year, saying such a move was unlikely.

“We on the committee have the view that inflation is going to come down not so quickly, it will take some time,” he told reporters, and “in this world, if those projections are broadly correct, it would not be appropriate to cut rates” this year. .

“soft landing”

However, Powell agreed that “policy is hawkish,” and said that makes it possible that the central bank may have done enough on rates, especially given the growing pressures in the economy, and the possibility that a tightening of credit by banks could slow the economy. More than expected. The remaining Fed hopes that a recession can be averted.

The Fed’s policy rate is now roughly the same as it was on the eve of a destabilizing financial crisis 16 years ago, and is at a level that the majority of Fed officials expected in March to actually be “constrained enough” to return inflation to the central bank’s 2% target. . Inflation is currently still more than double that target.

The Fed said in its statement that economic growth remains modest, but “recent developments are likely to lead to tighter credit conditions for households and businesses and to affect economic activity, employment and inflation.”

Still, the Fed said job gains “were solid,” and Powell noted that some recent data on declining jobs and lower earnings growth, along with historically low unemployment, supported the notion that the economy could slow without a significant rise in unemployment.

“The issue of avoiding a recession is, in my opinion, more likely than a recession,” Powell said.

The risks over a US debt limit showdown between Congressional Republicans and Democratic President Joe Biden have added to a sense of caution about trying to tighten financial conditions further.

The shift in the Fed’s approach was reflected in US interest rate futures, which showed general expectations not to raise rates at either of the central bank’s next two policy meetings.

US stocks initially held on to gains after the release of the Federal Reserve’s statement, but fell later in the afternoon and closed lower. US Treasury yields fell sharply, while the dollar weakened against a basket of trading partner currencies.

“For me, the key was changing one word, saying they think they will decide whether future increases are necessary, whereas last time they said they expected price increases will be necessary,” said Sam Stovall, chief investment strategist at CFRA Research. “With the word ‘identify’ instead of ‘expect’, (it’s) basically telling the markets that the Fed is on pause right now.”

(Reporting by Howard Schneider). Editing by Paul Simao

Our standards: Thomson Reuters Trust Principles.