US Fed Announces 0.25% Interest Rate Hike - Tenth Since Pandemic
18:20 GMT 03.05.2023 (Updated: 21:26 GMT 03.05.2023)
© Sputnik / Nina Zotina
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WASHINGTON (Sputnik) - The Federal Reserve on Wednesday announced its tenth rate hike since the end of the COVID-19 outbreak, adding a quarter point to bring US rates to a peak of 5.25% from the 0.25% high they stood at three years ago.
But the central bank dropped the language that it had used in recent months that it "anticipates" more policy firming may be appropriate to attain a "sufficiently restrictive" stance. That was a signal that the Fed will likely pause on rate hikes from June onwards.
"The Committee decided to raise the target range for the federal funds rate to 5 to 5-1/4 percent," the Fed said in a statement announcing the latest rate decision by its Federal Open Market Committee.
In a departure from previous wording though, it added that the committee will closely monitor incoming information and assess the implications for monetary policy.
"In determining the extent to which additional policy firming may be appropriate to return inflation to 2 percent 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," it stated.
Shortly after news broke of the interest hike, Fed Chair Jerome Powell told reporters at a news conference that "inflation has moderated somewhat since the middle of last year," although price pressures "continue to run high and [the] process of getting inflation back down to 2% has a long way to go."
US inflation, trending at between 4% and 5% per year, depending on the indicator, is well below the four-decade high of above 9% tracked by the key Consumer Price Index in June last year.
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Powell said the dropped line from its latest rate decision that additional policy firming may be appropriate was a "meaningful change," suggesting the central bank might actually pause on rates come June, should inflation conditions become more favorable.
The only concession the Fed chair was willing to make was to say that support for the quarter point hike decided by the FOMC on Wednesday "was very strong across the board."
But when asked about a pause in June, he began to waver.
"People did talk about pausing but not so much at this meeting," Powell said. "I mean there is a sense that, you know, we're much closer to the end of this [inflation battle] than [we were at] the beginning. If you add up all the [monetary] tightening that's going on through [the] various channels, we feel like we're getting close or maybe even there. But then again that's going to be an ongoing assessment."
The Fed’s dilemma on whether to pause or continue with rate hikes comes after a group of ten lawmakers aligned with President Joe Biden called on the central bank to stop its monetary tightening which they said have the "potential to throw millions of Americans out of work."
The Fed has a mandate of ensuring "maximum employment" through a jobless rate of 4% or below, and keeping inflation "manageable." The last was a task easily achieved before the COVID-19 breakout, when prices expanded less than 2% a year. The pandemic and the trillions of dollars of relief spending by the government, however, triggered runaway inflation since mid-2021.
Should the Fed stall on rate hikes after this, it would not be surprising as data was increasingly pointing to weakness in US economic data, say economists. Over the past week alone, gross domestic product data for the first quarter showed an anemic 1.1% growth on the year versus the 2.6% in the fourth quarter of 2022.
A US banking crisis that broke in March resurfaced in part this week with the takeover of San Francisco-based First Republic Bank. Adding to that were concerns about a potential US debt default, the first ever, and more weak readings on factory orders and durable goods.
On Friday, the Labor Department is expected to report a non-farm payrolls growth of just around 180,000 for April versus 236,000 in March.
Powell acknowledged that most of the data meant that a less hawkish environment was needed for rates. But he said he wasn’t sure about the jobs market, which he said was the Fed’s biggest challenge in fighting inflation.
"The labor market is very, very strong, whereas inflation is running high, well above our goal," Powell said. "And right now, we need to be focusing on bringing inflation down. Unfortunately, we have been able to do that so far without unemployment going up."
The central bank in the past has said that higher-than-usual spending by Americans due to robust job and wage growth opportunities were among reasons why it could not stop raising rates to tackle inflation.
Since initial business disruptions from the pandemic that led to a loss of 20 million jobs, the US labor market has added hundreds of thousands of positions each month for more than two years, bringing unemployment to 50-year lows of well below the Fed’s 4% target for the jobless rate. Wages have also grown almost non-stop in that duration, enabling the vast majority of Americans to continue spending.
