The Federal Reserve voted unanimously to raise interest rates by a quarter point Wednesday, the tenth rate hike since the central bank started its battle against inflation last March.
The move comes amid ongoing fragility in the banking sector triggered partly by higher interest rates, and following the collapse of three regional banks.
The quarter-point increase brings the benchmark federal funds rate to a level of 5%-5.25%, its highest level in more than 15 years.
The Fed’s post-meeting statement re-emphasized the central bank’s commitment to bringing down inflation, but did not include a notation that “some additional policy firming may be appropriate,” which was included in its prior release. That omission leaves open the possibility for an upcoming pause in rate hikes.
With regard to timing of that pause, Fed Chair Jerome Powell said at his post-meeting press conference that the central bank would “approach that question at the June meeting.”
Support for the rate hike was “very strong across the board,” Powell said, but there was some discussion about eventually suspending rate increases.
“People did talk about pausing, but not so much at this meeting. There’s a sense that we’re much closer to the end of this than to the beginning,” Powell said. “If you add up all the tightening that’s going on through various channels, we feel like we’re getting close or maybe even there, but again that is going to be an ongoing assessment.”
That debate among Fed officials could intensify in the coming weeks as borrowing becomes harder and the economy possibly inches closer to a widely expected recession.
“Emerging tensions between hawks and the doves on the committee over the idea that policy is sufficiently restrictive to return to the formal 2% target will almost surely drive the economic narrative over the next six weeks,” said Joseph Brusuelas, chief economist at RSM US. “The diversity of outlooks regarding the condition of the economy, the direction of inflation and the economic risk matrix will vividly underscore the growing divergence of views around the direction of policy,” he said.
However, Powell expressed some optimism about the economy’s resilience, pointing to the steep drop in job openings without a significant uptick in the unemployment rate.
Employers had 9.59 job openings in March, down from the peak of 12 million in March 2022, and the unemployment rate has not gone above 3.7% since the Fed began to lift rates last year.
Banking sector woes
The Fed noted that tougher lending standards are likely to slow the economy, which could help the central bank achieve its targeted inflation goal.
“Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring and inflation,” the Fed’s statement said. “The extent of those effects remains uncertain.”
Some evidence has already emerged that banks have toughened their lending standards since March, according to surveys of businesses and consumers. A key Fed survey of lending activity in the first quarter will be released next week, though a letter from an advisory group at the Treasury Department said the survey showed that “lending conditions were tightening before the banking stress emerged.”
Despite the collapse of First Republic, Powell played down fears of worsening turmoil in the banking sector. He said conditions have “broadly improved since March” and that many banks have been “attending to liquidity.”
On JPMorgan Chase’s acquisition of First Republic, Powell said “I think it is a good outcome for the banking system.”
“It would have been a good outcome for the banking system if one of the regional banks had bought this company,” he added.