The Federal Reserve raised the target range for its benchmark interest rate by 0.25% on Wednesday as it battles stubborn inflation and a banking crisis which has pushed the central bank into taking its largest emergency actions since the onset of the pandemic.
The rate hike brings the Fed’s policy rate, the federal funds rate, to a new range of 4.75%-5%, the highest since October 2007.
Most notably, the Fed set the stage for ending its rate hiking cycle, doing away with language for “ongoing rate increases” in interest rates, saying instead 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.” Officials expect to continue their current balance sheet runoff as planned.
Fed officials left unchanged how high they see raising rates rising, keeping peak interest rates for this year in a range of 5%-5.25%, the same as projected back in December. Seven officials see raising rates higher than 5.25% this year, with one member seeing rates go as high as 6%. No officials see rate cuts this year.
Officials said they will closely monitor incoming information and assess the implications for monetary policy.
Leading up to the bank failures and before the Fed’s ten-day quiet period ahead of its policy meeting, many Fed officials were calling to raise rates higher than the 5%-5.25% previously forecast in December.
Powell told lawmakers three weeks ago that interest rates are likely to rise more than previously thought given stronger-than expected data preceding the latest inflation and jobs numbers. He also opened the door to raising rates at a faster pace – the market interpreted as 50 basis points – if inflation data remained hot and the February jobs report clocked in strong.
“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,” Powell told the Senate Banking Committee on March 7.
The central bank is balancing the consequences of contagious bank runs and inflation that remains well above the Fed’s 2% target, presenting a complicated situation for the Fed.
The Fed said inflation remains elevated and that the central bank remains “highly attentive to inflation risks,” while banking issues could cause credit conditions to tighten and weigh on economic growth.
“The U.S. banking system is sound and resilient,” officials said in their policy statement. “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.
Officials also said that job gains have picked up in recent months and are running at a robust pace. The expects the unemployment rate to tick down to 4.5% fro, 4.6% previously forecast. Inflation is expected to tick up to 3.6% from 3.5% projected in December and growth is seen expanding at just 0.4% from 0.5% previously forecast.
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