US Fed announces latest interest hike in wake of banking turmoil

The Fed has continued its cycle of rate increases aimed at stemming inflation, but indicated a pause could be on the horizon.

The United States Federal Reserve has announced its latest interest rate hike, a move aimed at lowering inflation by making borrowing more expensive for consumers.

The increase of a quarter of a percentage point on Wednesday sets the US central bank’s benchmark overnight interest rate in the 4.75 to 5 percent range, its highest level in 15 years.

The increase was widely expected and underscores the Federal Reserve’s determination to rein in inflation, which remains above policymakers’ long-term annual target of two percent.

But the interest rate increase follows the sudden failures this month of Silicon Valley Bank (SVB) and Signature Bank. Critics blamed the Fed’s relentless rate hikes for contributing to the failures, part of the biggest banking sector meltdown since the 2008 financial crisis, and some observers speculated that policymakers would be forced to pause the interest rate increases.

When asked on Wednesday if such a pause had been considered for the latest cycle, Federal Reserve Chair Jerome Powell said, “We did consider that.”

Nevertheless, Wednesday’s policy statement said the US banking system is “sound and resilient”. It added that recent stress in the sector was “likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation”.

The Fed also indicated that a pause in interest rate increases may be on the horizon. The latest policy statement omitted the oft-repeated language that “ongoing increases” in interest rates “will be appropriate”.

That phrase had been in every policy statement since March 16, 2022, when the Fed made its decision to start hiking rates to address inflation.

Now, the language has been softened. On Wednesday, the policy-setting Federal Open Market Committee said instead that “some additional policy firming may be appropriate”.

That leaves open the chance that the Fed may still lift rates one more quarter percentage point, perhaps at its next meeting in May, but it also suggests that the next hike could represent an initial stopping point for the rate increases.

Wednesday’s hike was the same size as the central bank’s previous rate decision in February.

The three major US stock indexes, which were mostly languid prior to the Fed announcement, moved higher in the immediate aftermath, as investors digested the hike and the accompanying statement.

Meanwhile, Powell said on Wednesday that — while recent stress on the banking system has added uncertainty to the outlook — it’s still possible the economy may not face a sharp downturn as the Fed works to contain inflation.

In terms of a soft landing for the economy, “There’s a pathway to that, and that path still exists,” Powell said.

Officials also projected the unemployment rate would end the year at 4.5 percent, slightly below the 4.6 percent seen in projections issued in December. The outlook for economic growth also fell slightly to 0.4 percent from 0.5 percent in the previous projections.

Inflation is now seen ending the year at 3.3 percent, compared to 3.1 percent in the last projections.