The Fed, on Wednesday, approved its tenth hike in interest rates in a little over one year. This dropped a hint that the present tightening cycle is at an end. In a unanimous decision expected by markets, the Federal Open Market Committee has raised its borrowing rate by 0.25 % point. The rate is set according to what banks charge each other for overnight lending. However, it feeds through many customer debt products. For example, auto loans, mortgages, and credit cards. The increase takes the Fed funds rate from 5 percent to 5.25 percent, the highest since August 2007.
Markets are more focused on whether the Federal Reserve will pause here. This is particularly with concerns over economic growth and the banking crisis that has moved the nerves on Wall Street. Stocks rose slightly, and treasury yields were lower following the Federal Reserve news. However, the stocks struggled to hold the gains.
Tight credit for households
The decision on Wednesday came in the middle of the U.S.A’s economic weakness. And this was over the objections of Democratic lawmakers, who requested the Federal Reserve this week to stop the rate hikes. This is because they insisted it could cause a recession and also a huge loss of jobs.
But, the labor market has remained strong since the increases began in March 2022. Also, inflation is above the 2 percent target. This, the policymakers consider as optimum. Many officials said that the rates will require to remain elevated even if Fed puts the hikes on hold.
Jerome Powell told the reporters that inflation had moderated since the middle of the previous year. Nonetheless, inflation pressures remain high, and lowering inflation to 2 percent has a long way to go.
With inflation, the Federal Reserve had to deal with turmoil in the banking sector that saw 3 mid-size banks collapse. Though the central bank officials insist that the industry is stable, an anticipated tightening in credit conditions and heightening regulations ahead are anticipated to understand further the economic growth that was 1.1 percent annualized in the first quarter.
The after-meeting statement said that the tighter credit conditions for households and businesses may weigh on inflation, economic activity, and hiring. The Federal Reserve’s economists, at the March’s Federal Open Market Committee meeting, had warned that a slow recession is likely because of the banking crisis.
Now, the issues in the financial field continued, with JPMorgan Chase acquiring the First Republic Bank.
The statement from the meeting reiterated that the financial growth was good, the job prospect gains were also good, and the inflation was elevated.
The chief global strategist at LPL Research, Quincy Krosby, said that although the Federal Open Market Committee statement is more dovish, it makes it clear that the Federal Reserve stays data-dependent. It acknowledges that inflation stays elevated. Also, it underscores that Fed would like to monitor the cumulative effects of its fast rate hikes campaign.
Quincy Krosby further said that the statement has given a good platform from which the Federal Reserve may move in any direction.
Higher rates have been an addition to the banking crisis. However, the Federal Reserve officials focus on inflation.
Recent data points indicated a softening in cost increases. This is, though, for items like housing prices or medical care that remained high. The costs that tend to change, like energy and food, have decelerated. This is according to the Atlanta Fed calculations.
Now, markets hope the slow growth and fear of recession can force Fed to cut rates later this year.