The Federal Reserve raised interest rates by a quarter of a percentage point but signaled it was about to pause further increases in borrowing costs amid recent turmoil in financial markets spurred by the collapse of two US banks.
The move put the US central bank’s benchmark interest rate in the 4.75-5.00 percent range, with updated forecasts showing that 10 of 18 Fed policymakers still expect rates to rise another quarter of a percentage point by the end of this year, which is about the same. The endpoint seen in the December forecast.
But in a major shift prompted by the sudden failures of Silicon Valley Bank (SVB) and Signature Bank this month, the Fed’s latest policy statement no longer says “continued increases” in interest rates are likely to be appropriate.
This language has been in every policy statement since the March 16, 2022 decision to begin the price-raising cycle.
Instead, the FOMC said only that “some additional policy stabilization may be appropriate,” leaving open the opportunity for a quarter-percentage-point increase, possibly at the next Fed meeting, representing at least a point. Initial stop to price hikes.
Although the policy statement said the U.S. banking system is “sound and resilient,” it also noted that recent stress in the banking sector “is likely to result in tougher credit conditions for households and businesses and to affect economic activity, employment, and inflation.” “.
There was no opposition to the policy decision.
The document did not assume that the battle with inflation had been won.
The new statement dropped the phrase that inflation had “reduced” and replaced it with a declaration that inflation “remains high”.
Job gains are “robust,” according to the Federal Reserve.
Officials expected the unemployment rate to end the year at 4.5 percent, just down from 4.6 percent in December, while projections for economic growth eased slightly to 0.4 percent from 0.5 percent previously forecast.
Inflation is now expected to end the year at 3.3 percent compared to 3.1 percent previously forecast.
The outcome of this week’s two-day meeting points to a surprising repositioning of US central bank strategy just two weeks ago, when Fed Chair Jerome Powell testified in Congress that hotter-than-expected inflation could force the central bank to raise interest rates higher. Perhaps faster than expected.
The March 10 collapse of California-based SVB and the subsequent collapse of New York-based Signature Bank highlighted broader concerns about the health of the banking sector, and raised the possibility that an increase in federal interest rates could tip the economy toward a financial crisis.
Fed policymakers think beating inflation may require just one rate hike this year, but that easing next year will be less than most thought just three months ago.
US central bankers see the policy rate, now in the 4.75-5.00 per cent range after Wednesday’s 25 basis point increase, at 5.1 per cent by the end of the year, according to the median estimate in the latest quarterly summary of economic outlooks from the US. Fed.
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