Federal Reserve implements quarter-point rate rise and signals potential pause

The Federal Reserve raised its benchmark interest rate by a quarter of a percentage point on Wednesday, its tenth consecutive increase in just over a year, but signalled it could soon pause its aggressive monetary tightening campaign.

The Federal Open Market Committee’s latest increase, which had unanimous support from policymakers, brings the federal funds rate to a new target range of 5-5.25 per cent, the highest level since mid-2007.

In a statement released after its two-day gathering, the Fed scrapped previous guidance it provided in March, when it said “some additional policy firming may be appropriate” to bring inflation under control.

On Wednesday, the FOMC said it would take into account its rate rises so far — and the fact they would take time to feed through to the economy — when “determining the extent to which” further increases “may be appropriate”. It also said it would be guided by future economic data.

In a press conference following the decision, Fed chair Jay Powell described the change of language as “meaningful”. He warned the recent banking turmoil appeared to be “resulting in even tighter credit conditions for households and businesses”, which was likely to weigh on economic activity and the labour market.

He added: “In light of these uncertain headwinds, along with monetary policy restraint we put in place, our future policy actions will depend on how events unfold.”

In the futures market, investors reduced wagers on future rate rises, suggesting that they think this may be the Fed’s last increase of the current cycle.

In March, most officials projected the fed funds rate would peak at 5.1 per cent this year, suggesting no further rate rises beyond the current level.

In its statement, the FOMC said that while inflation remains “elevated”, tighter credit conditions stemming from the recent banking turmoil “are likely to weigh on economic activity”.

The meeting came at a fraught moment for the US economy and financial system as midsized lenders continue to be clobbered after a series of bank failures.

First Republic on Monday became the third bank to be seized by US regulators in the past two months, with the Federal Deposit Insurance Corporation brokering a hasty takeover by JPMorgan. That followed emergency measures that government authorities took in March, just days before the last Fed meeting, to stem contagion after the implosion of Silicon Valley Bank and Signature Bank.

Officials must try to balance a potential credit contraction stemming from the banking turmoil against the fact that inflation remains stubbornly high and price pressures are moderating only gradually.

Powell has previously said a credit crunch could act as a substitute for further rate rises by damping economic activity.

In a sign the red-hot labour market has already cooled off, new data this week showed that lay-offs rose to the highest level in more than two years in March as the number of job openings declined.

The Fed has said bringing inflation under control will require a period of “below-trend growth and some softening in labour market conditions”.

That suggests the unemployment rate will rise from its near-record low of 3.5 per cent. As of March, the median peak forecast among officials was for 4.6 per cent unemployment in 2024.

Many economists expect Wednesday’s increase will be the last of this cycle, especially after the Fed’s own staffers soured on the outlook and started forecasting a mild recession this year.

Officials have stressed the need for “flexibility and optionality” in setting monetary policy against an uncertain economic backdrop. That suggests that even if a pause is imminent, Fed policymakers do not want to box themselves in by ruling out further rate rises.

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