Federal Reserve announces a quarter-point increase in interest rates and signals a possible pause

The Federal Reserve increased its benchmark interest rates by a quarter-point on Wednesday. It was the tenth increase in a row, and it is expected to stop its aggressive campaign of tightening monetary policy soon.

Federal funds rate now reaches a new range of 5 to 5.25 percent, highest since mid-2007, thanks to the latest Federal Open Market Committee increase.

In a press release released following its two-day meeting, the central banks retracted guidance they provided in March when it stated that “some additional policy tightening may be appropriate” for inflation to be brought under control.

On Wednesday, the FOMC said that it would “determine the extent” to which further increases “may appropriate” by taking into consideration its rate hikes to date — and the fact that they will take time to “feed through to the economic system”. The FOMC also stated that it would be guided based on future economic data.

At a press briefing following the announcement, Fed Chair Jay Powell called the change in language “meaningful”. In a press conference following the decision, Fed chair Jay Powell described the change of language as “meaningful”.

He said: “In view of these uncertain headwinds and the monetary policy restrictions we have put in place, future policy decisions will depend on what happens.”

Investors betted that this could be the last rate increase by the Fed in the current cycle, and the yield on the 2-year Treasury note fell to its lowest point in a year. The yield fell 0.11 percentage points, to 3.86 percent.

Kristina Hooper, Invesco’s chief global market analyst, stated: “This appears to be a dovish increase.” The overwhelming evidence indicates that the Fed won’t continue to raise rates unless the data force the Fed to do so.

Most officials predicted that the Fed Funds rate would reach a maximum of 5.1% this year. This suggests no rate increases beyond the current rate.

In its statement, FOMC stated that tighter credit standards resulting from recent banking turmoil are “likely to have a negative impact on economic activity”, even though inflation is still “elevated”.

The meeting took place at a time when the US financial system and economy are in a precarious position.

First Republic became the third US bank to be taken over by regulators within the last two months. The Federal Deposit Insurance Corporation facilitated a quick takeover of JPMorgan. This was in response to the emergency measure taken by government authorities just days before last Fed meeting.

Officials need to find a balance between a possible credit contraction resulting from the turmoil in the banking sector and the fact that the inflation rate remains high, and the price pressures only moderate slowly.

Powell said Wednesday that “in principle, rates won’t be as high as they would have been if this [banking crisis] hadn’t happened.”

Powell responded, “Policy is tight,” when asked if the benchmark rate of 5% to 5.25 % was enough to control inflation.

He said that a 5-percentage-point jump in the Fed Funds Rate combined with tighter credit and the Fed’s plan to shrink its balance sheets “makes you feel that we are not far away or perhaps at that level”.

Hooper, from Invesco, said: “Powell admitted it. . . The Fed is assisted in some ways by the tightening of credit conditions. There’s also a psychological component to it – that is, the recognition that the more rates are raised by the Fed, the more likely things will break.