Federal Reserve Hints at Possible Pause, Raises Interest Rates a Quarter Point

On Wednesday, the Federal Reserve raised its benchmark interest rate by a quarter point but hinted at a long-awaited pause in the most aggressive series of hikes since the 1980s.

The unanimous and widely expected decision puts the critical benchmark federal funds rate in a range of 5% to 5.25%, the highest seen since 2007. The percentage was near zero for a little longer than a year ago. The increase marks the 10th straight increase aimed at slowing the economy and combating high inflation.

However, for the first time in a year, policymakers indicated future rate increases are not a given and hinted that additional policy moves will depend on “incoming information.”

“In determining the extent to which additional policy firming may be appropriate to return inflation to 2% over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments,” said the Fed in its post-meeting statement.

The statement eliminated a previous sentence that said the “Committee anticipates that some additional policy firming may be appropriate” for inflation to approach the Fed’s 2% goal but offered minimal clarity beyond that.

“A decision on a pause was not made today,” said Chairman Jerome Powell to reporters during a post-meeting press conference in Washington, D.C. However, he noted the “meaningful” change in an official statement.

“We’re no longer saying that we ‘anticipate,’” said Powell. “We’ll be driven by incoming data, meeting to meeting. We’ll approach that question at the June meeting.”

Meeting follows continued volatility in the financial sector

The meeting follows continued volatility within the financial sector after the third U.S. bank implosion this week. San Francisco-based bank, First Republic, catered to wealthy investors and was seized by federal regulators and sold to JPMorgan Chase Monday.

During the credit crunch, banks raised their lending standards significantly, making it more challenging to get a loan. Borrowers may need to agree to more strict terms like high-interest rates as banks to try to reduce the financial risk on their end.

In turn, fewer loans lead to less spending on big-ticket items by businesses and consumers.

While the move could help the Fed fight to tamp down persistently high inflation, it also raises a recession risk this year. The Fed reiterated its March statement, warning that economic fallout from tighter credit conditions remains “unclear.”

“Tighter credit conditions from households and businesses are likely to weigh on economic activity, hiring, and inflation,” said the Fed. “The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.”

Inflation showed signs of cooling in March, according to data released by the Labor Department last month. But core prices showed underlying price pressures that are still simmering beneath the surface.

The Consumer Price Index remains around three times higher than the pre-pandemic average and underscores the continuing financial burden high prices placed on millions of households across the U.S.

The Fed anticipates inflation will continue to be an issue for some time and is predicted to hover around 3% at the end of the year, said Powell. He noted, “In that world, it would not be appropriate” to cut interest rates.

“That’s not our forecast,” Powell said.

Despite the higher interest rates, the labor market has remained resilient. New data released Wednesday morning by ADP showed that private employers added 296,000 jobs last month. The number is the highest monthly increase since July 2022.