Fed raises interest rates a quarter point, hints at pause in inflation fight

The Federal Reserve on Wednesday raised its benchmark interest rate by a quarter of a point, but opened the door to a long-awaited pause in its most aggressive tightening campaign since the 1980s. 

The widely expected and unanimous decision puts the key benchmark federal funds rate at a range of 5% to 5.25%, the highest since August 2007, from near zero a little more than one year ago. It marks the 10th consecutive rate increase aimed at combating high inflation and slowing the economy.

But for the first time in a year, policymakers signaled that future rate increases are not a given, suggesting that additional policy moves will hinge on “incoming information.” 

“In determining the extent to which additional policy firming may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments,” the Fed said in its post-meeting statement.

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The statement omitted a previous sentence that said the “Committee anticipates that some additional policy firming may be appropriate” for inflation to return to the Fed’s 2% goal,” but offered little clarity beyond that.

“The tenth Fed hike may be wrapping up the most aggressive tightening cycle in 40 years – but perhaps there’s still one more to go,” said Seema Shah, chief global strategist at Principal Asset Management. “With housing activity showing tentative signs of recovery, unemployment stuck near record lows and, most importantly, inflation decelerating so slowly that it may plateau at an elevated level in the coming months, Powell has kept the door slightly ajar for another hike.” 

The meeting comes in the shadow of continued volatility within the financial sector, after the third implosion of a U.S. bank this week. First Republic, a San Francisco-based bank that catered to the wealthy, was seized by federal regulators and sold to JPMorgan Chase Monday. 

During a credit crunch, banks significantly raise their lending standards, making it difficult to get a loan. Borrowers may have to agree to more stringent terms like high interest rates as banks try to reduce the financial risk on their end. Fewer loans, in turn, lead to less big-ticket spending by consumers and businesses. 

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While that could help the Fed in its fight to tamp down stubbornly high inflation, it also raises the risk of a recession this year. The Fed mostly reiterated its statement from March, warning that economic fallout from tighter credit conditions remains “uncertain.” 

“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 these effects remains uncertain. The Committee remains highly attentive to inflation risks.”

Inflation showed welcome signs of cooling in March, according to Labor Department data released last month. But core prices pointed to strong underlying price pressures that are still bubbling beneath the surface. The consumer price index remains about three times higher than the pre-pandemic average, underscoring the persistent financial burden high prices have placed on millions of U.S. households.

This is a developing story. Please check back for updates.