On Wednesday, the Federal Reserve raised the target range for its benchmark interest rate by 25 basis points, as it weighs the importance of stifling a stubborn inflation, compared to exacerbating a potentially threatening banking crisis.
The new rate hike brings the federal funds rate to a range of 4.75%-5%, the highest it has been since October of 2007.
The Fed noted in its statement that it was remaining “highly attentive to inflation risks,” however it was also sensitive to the fact issues in the banking sector could cause credit conditions to tighten and impact economic growth.
However the regulator asserted, “The U.S. banking system is sound and resilient.”
Officials went on, “Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring and inflation. The extent of these effects is uncertain.”
Most notably the central bank gave an indication it may now end its rate-hiking cycle, as it eliminated any language regarding, “ongoing rate increases” in interest rates.
Instead the statement by the Fed said, “The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time.”
Left unchanged was how high officials see rates rising, with the central bank keeping peak interest rates for the year in the range of 5%-5.25%, the same as was forecast in December. Seven officials see rates rising above 5.25%, and one sees rates going as high as 6%. No officials forecast rate cuts this year.
Fed Chair Jerome Powell had said in early March, in comments to lawmakers, that given stronger than expected jobs data and inflation numbers, interest rates would likely rise more than had been previously forecast.
Powell also indicated rates might rise at a faster pace than previously thought, which was interpreted by the markets as a 50 basis point rate hike, in the event inflation data continued to remain hot, and the February jobs report was robust.
In statements March 7, Powell told the Senate Banking Committee, “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”
