The Federal Reserve hiked interest rates by a quarter of a percentage point on Wednesday, marking its 10th straight hike in an aggressive campaign to curb rapid inflation. But they have also opened the door to a moratorium as their policies, combined with bank turmoil, have weighed on the economy.
The central bank has raised interest rates to the 5-5.25% range, the highest since the summer of 2007. The move capped his fastest string of rate hikes since the 1980s, as the central bank sought to slow growth and keep inflation under control.
But in a statement announcing the decision, policymakers softened their words about future rate hikes, saying additional moves “could be” appropriate. Fed Chairman Jerome H. Powell stressed at a press conference after the announcement that any additional changes would depend on future economic data.
Taken together, these statements were a meaningful change in the Fed’s stance. For months, officials thought an additional increase would be needed. Now they may stop raising interest rates at an upcoming meeting.
But central banks have been careful to keep their options open in a moment of great uncertainty in the economy, acknowledging that they can continue to raise rates if the economy and inflation prove to be overheating. suggests.
“A decision to suspend was not made today,” Powell said at a press conference.
Stock markets, which had initially reacted positively to the Fed’s statement, plunged after Powell’s remarks suggested a gradual path for interest rates was not guaranteed. The S&P 500 closed him down 0.7%.
The Fed’s cautious stance reflects a complex set of challenges facing central banks. Inflation remains well above his 2% target even after recent easing, and growth is showing signs of resilience despite the central bank’s aggressive rate moves. At the same time, turmoil in the banking sector could slow lending and increase the likelihood of a recession, and an impending debt limit confrontation could trigger market turmoil, among other risks.
Fed officials are trying to understand how much they expect the economy to slow given these developments, and what that means for policy.
“Credit conditions are probably tightening a bit more than they normally would,” Powell said. “You have to take all of that into consideration.”
Since early March, three major banks have failed, requiring government intervention. Mr. Powell suggested that at least some banks were holding back on extending credit because of sector troubles. However, he was clear that the extent of the impact was uncertain.
If consumer spending remains strong despite bank turmoil and rising interest rates, businesses may be able to continue raising prices. In that case, the Fed may have to do more to make sure inflation is back under control. may instead take a more cautious stance.
Krishna Guha, head of Evercore ISI’s global policy and central bank strategy team, said Powell’s remarks echoed the Fed’s “not sure if it’s done, but I think it could be done.” said to indicate that
When the Federal Reserve raises interest rates, it becomes more expensive for families to take out loans to buy homes and cars, and for businesses to raise money to expand their businesses, and often more. It becomes difficult. This will slow both consumer spending and employment. As wage growth slows and unemployment rises, people become more cautious, further slowing the economy.
The chain reaction is painful.When Paul Volcker’s Fed interest rate hike By the early 1980s it was close to 20%. push unemployment 10 percent or more. But today the Federal Reserve does not expect to raise interest rates that high, and officials are hopeful that a “soft landing” can be achieved. people lose their jobs.
Mr. Powell has argued that it may be possible to slow the economy without triggering a recession, a view he reiterated on Wednesday. Powell said he thinks it’s likely.
Given the possibility of a recession, the Federal Reserve’s recent interest rate moves have come under increasing scrutiny, including by Congressional Democrats. Many are wondering if central banks are risking a deep recession and could hurt unemployment by raising borrowing costs during a time of economic challenges.
Brendan F. Boyle, a senior member of the House Budget Committee and a Pennsylvania Democrat, said the Fed’s latest rate hike was “rash and will only increase the risks facing the economy.”
Achieving a mild economic slowdown could be more complicated given recent bank troubles. The Fed’s actions have played a role in this problem. Many of the banks, which have been under stress in recent weeks, have not been able to adequately protect themselves from rising interest rates, and have suffered as they have lowered the market value of their previous mortgages and securities holdings.
We have already seen other signs that the Fed’s move is starting to hurt the economy. More expensive mortgages have led to a significant slowdown in the housing market. Employment is gradually easing and job openings are down. Not fulfilled.
On the other hand, however, inflation has been rapid over the last two years, showing staying power. Rising prices are increasingly being driven by service industries such as travel and childcare, rather than temporary supply shortages or higher oil prices. As such, it may be difficult to curb current inflation entirely.
Fed chairman says he and his fellow officials believe inflation will take time to stabilize He added that it may be necessary to
“In that world, lowering interest rates would not be appropriate,” he said.
But the market sees things differently. Investors are mainly betting Fed officials won’t be raising interest rates further this year, with some predicting a rate cut as early as this summer. Many expect interest rates to be well below current levels by the end of the year.
These expectations may mean that investors are nervous about possible defaults on debt limits. The Treasury Department announced this week that the government may run out of space to continue paying his bills by June 1.
Powell has been repeatedly questioned about the debt ceiling at press conferences, saying that while it is not his position to advise lawmakers, raising the debt ceiling is essential and if Congress fails to do so, the central bank has the authority to do so. We must be confident that we can use
“We shouldn’t be talking about a world where America doesn’t pay,” Powell said.
Madeleine Go contributed to the report.
