Fed raises interest rates, opens door to pause in tightening cycle

WASHINGTON, May 3 (Reuters) – The Federal Reserve moved its management of the post-pandemic economic recovery into a new phase on Wednesday with what could be the latest in a historic series of interest rate hikes and heightened attention to credit and other financial risks.

The US central bank raised its benchmark interest rate overnight by a quarter of a percentage point to a range of 5.00%-5.25%, as expected by financial markets, but in doing so fell short of its policy statement, saying it “anticipates” further rate hikes. increases would be necessary.

The change does not preclude the central bank’s policy committee from raising interest rates again when it meets in June, but Fed Chairman Jerome Powell said it was now an open question whether further increases would be justified in an economy still facing high inflation but also showing signs of a slowdown and with the risk of a tough credit breakdown from banks on the horizon.

“We’re getting closer, or maybe even there,” Powell said of the endpoint of interest rate hikes that have raised the Fed’s key rate by as much as 5 percentage points in the 10 meetings since March 2022, a blistering pace for the central bank and one that could now justify letting some time before the effect can be fully felt.

Using language reminiscent of when it halted the tightening cycle in 2006, the Fed said that “in determining the extent to which further policy tightening may be appropriate,” officials would take into account how the impact of monetary policy accumulated in the economy.

Top of mind: inflation and the impact of a credit crunch Fed officials believe are still evolving in the wake of both higher interest rates and a financial sector rattled by the recent failure of three US banks.

In a press conference after the release of the statement, Powell said that inflation remains the main concern and that it is therefore too early to say with certainty that the rate hike cycle is over.

“We are prepared to do more,” he said, with policy decisions from June onwards to be made on a “meeting-by-meeting” basis.

He also pushed back on market expectations that the policy-making Federal Open Market Committee would cut interest rates this year, saying such a move was unlikely.

“We on the committee take the view that inflation is not going to come down that quickly, it will take some time,” he told reporters, and “in that world, if that forecast is broadly correct, it would not be appropriate to cut course” this year.

‘SOFT LANDING’

However, Powell agreed that “policy is tight,” saying it makes it possible that the central bank has done enough with interest rates, especially given the developing strains in the economy, the possibility that credit tightening by banks could slow the economy more than expected, and a remaining Fed hopes recession can be avoided.

The Fed’s key interest rate is now about the same as it was on the eve of a destabilizing financial crisis 16 years ago, and is at the level that a majority of Fed officials estimated in March would actually be “sufficiently restrictive” to return inflation to the central bank’s target 2 percent. Inflation is currently still more than double the target.

Economic growth remains modest, but “recent developments are likely to lead to tighter credit conditions for households and businesses and weigh on economic activity, employment and inflation,” the Fed said in its statement.

Still, job gains “have been robust,” the Fed said, and Powell noted that some recent data on declining job openings and lower earnings growth, combined with historically low unemployment, supported the idea that the economy could slow without a dramatic rise in unemployment.

“The case of avoiding a recession is, in my view, more likely than having one,” Powell said.

The risks surrounding a US debt limit stand-off between congressional Republicans and Democratic President Joe Biden have added to the sense of caution about trying to tighten economic conditions further.

The change in the Fed’s approach was reflected in US interest rate futures, which showed broad expectations of no hikes at either of the central bank’s next two board meetings.

US stocks initially held their gains after the release of the Fed statement, but fell later in the afternoon and closed lower. US Treasury yields fell sharply, while the dollar weakened against a basket of trading partners’ currencies.

“To me, the key was a change of a single word, saying they believe they will determine whether future increases are necessary, whereas last time they said they expect further rate increases will be necessary,” Sam Stovall said. investment strategist at CFRA Research. “With the word ‘determine’ instead of ‘anticipate,’ (it) essentially tells the markets that the Fed is now on pause.”

Reporting by Howard Schneider; Editing by Paul Simao

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