US central bank lifts rates to highest in 16 years

The Federal Reserve has raised interest rates by a quarter of a percentage point and signalled it may pause further increases, giving officials time to assess the fall-out from recent bank failures, wait on the resolution of a political stand-off over the US debt ceiling and monitor the course of inflation.

The unanimous decision lifted the US central bank’s benchmark overnight interest rate to the 5.00 per cent-5.25 per cent range, the Fed’s tenth consecutive increase since March 2022.

In an overt shift, the central bank no longer said it “anticipates” further rates will be needed, only that it will watch incoming data to determine if more hikes “may be appropriate”.

In a change reminiscent of language used when it halted rate hikes in 2006, the Fed said in Wednesday’s unanimous policy statement that “in determining the extent to which additional policy firming may be appropriate,” officials will study how the economy, inflation and financial markets behave in the coming weeks and months.

The new language does not guarantee the Fed will hold rates steady at its next policy meeting in June and the statement noted that “inflation remains elevated,” and job gains are still “running at a robust pace”.

Following the release of the statement, Fed chair Jerome Powell said the central bank still viewed inflation as too high and that it remained concerned by high price pressures.

Because of that, Mr Powell said it was too soon to say the rate-hike cycle was over.

“We are prepared to do more” with rate rises if needed, and officials did not decide at the meeting to pause on a rate hike at the June policy meeting, and what happens next on rates is a decision that officials will make on a “meeting-by-meeting” basis, Mr Powell said.

But he also said he saw monetary policy as close to the place where it likely needed to rest.

“If you add up all the tightening that’s going on through various channels, we feel like we’re getting close or are maybe even there” on monetary policy,” he said.

“Policy is tight” and that made it possible that the central bank had done enough with rates, Mr Powell said.

He also pushed back on market expectations of rate cuts this year and said they were quite unlikely to happen.

“We on the committee have a view that inflation is going to come down not so quickly, it will take some time,” he said, and “in that world, if that forecast is broadly right, it would not be appropriate to cut rates” this year.

The Fed’s policy rate is now roughly the same as it was on the eve of a destabilising financial crisis 16 years ago, and is at the level which a majority of Fed officials projected in March would in fact be “sufficiently restrictive” to return inflation to target.

Inflation in the US remains more than twice the 2.0 per cent target level. Economic growth is modest but “recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring and inflation”, the Fed said.

Mr Powell also noted that he was still holding out for a “soft landing,” saying “the case of avoiding a recession is in my view more likely than that of having a recession”.

A soft landing is a scenario in which monetary tightening slows the economy, and inflation, without triggering a recession.

Risks around the recent failures of several US banks and a debt limit stand-off between Republicans in Congress and Democratic President Joe Biden have added to the Fed’s sense of caution about trying to tighten financial conditions further.

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