Interest rates in the U.S. have just hit the highest level since the start of the subprime mortgage crisis in 2007.
Federal Reserve officials agreed to raise interest rates by 0.25% during their two-day Federal Open Market Committee (FOMC) meeting in May, marking the 10th consecutive increase since March 2022 and the fastest rate cycle in more than 40 years.
The U.S. central bank’s decision to raise its Federal Funds Rate by 25 basis points to a range of 5.00%-5.25% follows recent turmoil in the U.S. banking sector and persistently-high inflation, which monetary policymakers have failed to lower to their 2% goal.
There is still much to be done to get inflation down to the 2% target, according to Michael Gapen, chief U.S. economist at Bank of America Securities.
“We maintain the first rate cut in March 2024,” Gapen said ahead of the May 2-3 policy meeting, Reuters reported. “Should the stresses in the financial system be reduced in short order, we cannot rule out that stronger macro data will lead the Fed to put in additional hikes beyond May.”
Although Wednesday’s less aggressive rate hike was expected to be the Fed’s final increase of 2023, FOMC members suggest that additional policy firming may be necessary to stop inflation.
To determine the extent to which additional rate increases are needed, the committee will closely monitor incoming information and assess the possible implications, according to a Federal Reserve statement released Wednesday following the FOMC meeting.
“The FOMC statement used language broadly similar to how officials concluded their interest rate increases in 2006, with no explicit promise of a pause by retaining a bias to tighten,” tweeted Nick Timiraos, chief economics correspondent for The Wall Street Journal.
Wednesday’s decision to raise interest rates by a quarter percentage point brings the Fed’s benchmark rate in line with its terminal rate. This could provide Central Bankers sufficient time to weigh the economic effects of their rate cycle, the recent bank fallout/government-orchestrated bailout, and the possibility of a recession later this year.
“It’s possible that we will have — what I hope would be — a mild recession,” said Federal Reserve Chairman Jerome Powell during a press conference on Wednesday.
With the benchmark interest rate now at 5%-5.25%, headline inflation at 5%, and core inflation at 5.6% as of April, the Federal Reserve said it will monitor incoming data before determining whether the economy has reached a point sufficiently restrictive enough to lower inflation to the Fed’s longer-run goal of 2%.
“Looking ahead, we’ll take a data-dependent approach in determining the extent to which additional policy firming may be appropriate,” Chair Powell said.
Powell is in a precarious situation that requires full economic awareness and a carefully crafted message, according to former Fed Vice Chair Richard Clarida.
“The chair will have his work cut out for him because when the chair will say ‘pause,’ the markets may hear ‘done.’ And if he says it again, they may hear ‘rate cuts,'” said Clarida, the WSJ reported.
Deliberations by the FOMC on whether to raise, pause, or cut rates will resume at the next policy meeting scheduled for June 13-14.
