US Federal Reserve increases key interest rates for the tenth time, signals potential pause

On Wednesday, the US Federal Reserve increased its key lending rate for the tenth time, which might be the final adjustment for the current cycle if the economy sufficiently contracts.

In an effort to combat price rises, the central bank launched an aggressive campaign of rate increases in March of last year. But more than a year later, inflation stubbornly continues to be higher than its long-term target of 2 per cent.

According to a statement from the Fed, the most recent quarter-point rise raises the target lending range to between 5.0 per cent and 5.25 per cent, the highest level in over 16 years.

According to the Fed, tighter credit requirements for individuals and companies will undoubtedly have an impact on the economy, albeit the size of that impact “remains uncertain.”

The policy-setting Federal Open Market Committee’s (FOMC) latest decision was in line with expectations, leading analysts and traders to scrutinize the statement for any shift in the Fed’s guidance on future decisions.

In its statement, the Fed said it will “take into account the cumulative tightening of monetary policy” and the lags with which policy impacts the economy, when “determining” whether to hike rates again.

This marks a departure from the last rate announcement in which policymakers said they expected “additional policy firming” could be needed to rein in inflation.

“Support for the 25 basis-point rate increase was very strong across the board,” Fed Chair Jerome Powell told a press conference after the decision was announced.

“A decision on a pause was not made today,” he said, later adding: “People did talk about pausing but not so much at this meeting.”

Banking woes

After a relatively calm period for banks following crisis-level concerns in March, this week saw the re-emergence of turbulence with the collapse of California-based lender First Republic.

The commercial bank’s failure — the second-largest in US history — was announced early Monday along with a sale to JPMorgan Chase, with regulators hoping that fears would finally be calmed.

But regional banks came under renewed pressure Tuesday, with some share prices declining by as much as 25 per cent on concerns about the impact of interest-rate hikes on their financial health. Further declines were recorded on Wednesday.

Powell sounded a more upbeat note on regional banks’ financial prospects, telling reporters that the resolution and sale of First Republic was “an important step toward drawing a line under that period of severe stress.”

Tighter credit conditions

Powell also sounded positive about the US economy, telling reporters that the chance of avoiding a recession was “more likely than that of having a recession,” due to the enduring strength of the labour market.

Minutes from the Fed’s last meeting showed that the US central bank was forecasting a mild recession for later this year, suggesting differing views within the Federal Reserve on the outlook for the American economy.

The broader US economic data remains mixed but is showing some signs of softening, with growth slowing to an annualized rate of 1.1 per cent in the first quarter.

The data on inflation paints a picture of slowing price increases in some areas and ongoing stubbornness in others, while figures on employment point to a weakening job market as the economy slows.

Fed officials have in recent weeks suggested that the tighter lending conditions after Silicon Valley Bank’s (SVB) dramatic collapse in March could act like an additional rate hike and help bring down inflation.

Powell refused to be drawn on exactly how much of an impact tighter bank lending conditions could have on the Fed’s decision-making.

But he conceded that “in principle, we won’t have to raise rates quite as high as we would have had this not happened.”

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