The Fed – On Wednesday, the Federal Reserve continued its attempts to combat the high inflation with another rate hike.
This time, they raised interest rates by a quarter point.
Additionally, they addressed risks to financial stability.
Despite the recent meltdown in the banking sector, investors and economists were wary of a potential quarter-point increase.
Federal Chairman Jerome Powell and legislators went into their second policymaking meeting of 2023 with an air of uncertainty due to the shifting landscape around the financial system.
In the past few weeks, the Fed’s initiative to bring down inflation had become difficult as several banks collapsed.
The situation led to the Fed working to balance a potential financial crisis as inflation continued to soar, and the labor market tightened.
A struggle on all fronts
When the meeting concluded, the Federal Reserve released a statement acknowledging the recent financial market dilemma was taking a toll on inflation and the economy.
However, officials expressed their confidence in the overall system.
“The US banking system is sound and resilient,” they wrote.
“Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring and inflation.”
“The extent of these effects is uncertain.”
According to the officials, the Committee is still keeping track of the inflation risks.
The banking crisis
The recent banking troubles have instilled fears across the country.
Many fear that the central bank might overcorrect the economy and potentially lead the country into a recession.
Others are afraid that their actions could trigger more bank failures.
Meanwhile, prominent economists have urged the Federal Reserve to hit the brakes on the rate hikes.
Their calls for a pause can be partly attributed to rate hikes undermining the value of Treasuries and other securities, which have always been a critical source of capital for most US banks.
For example, when Silicon Valley Bank had to sell bonds quickly at a substantial loss, it went through a liquidity crisis that led to its collapse.
Former New York Fed President Bill Dudley offered his two cents, saying, “The Fed’s in a bit of a bind.”
“On the one hand, they should keep tightening because inflation is still too high and the labor market is too tight.”
“On the other hand, they want to make sure they don’t do anything to exacerbate the stress on the banking system.”
“There’s not really a right solution.”
The rate hikes
Policymakers have made their decisions, and interest rates have increased for the ninth consecutive time.
They raised overnight lending rates to the highest level since September 2007, going from 4.75% to 5%.
Their actions send a clear message that right now, their top priority is restoring price stability.
It’s also important to note that the decision to raise rates by a quarter point was in complete accord.
Since June 2022, no policymaker has been against the decision for other similar decisions.
Additionally, they released their rate projections after their last release around December.
Projections have primarily aligned with previous forecasts.
Furthermore, the Federal Reserve is still anticipating more rate hikes as they expect interest rates to reach 5.1% by the end of the year.
With this in mind, the Feds expect another quarter-point rate hike before they decide to hit the brakes.
However, officials indicate that interest rates would likely stay high longer while they bring their projected Federal funds rate from 4.1% to 4.3% in 2024.
In March, Jerome Powell hinted that interest rates could move higher and remain there longer than previously anticipated.
With the current financial conditions, there might be less need to hold the rates higher to cool the economy and curb inflation.
Fed officials are projecting deeper economic cuts in the next two years.
Real GDP is a measure used for the economy, and it is forecast to grow by 0.4% in 2023, which is a step down from previous projections of 0.5%.
In 2024, officials anticipate the economy will grow by 1.2%, lower than the 1.6% expected in December.
Furthermore, Fed policymakers forecast unemployment dropping lower than expected by the year’s end – 4.5% from the earlier 4.6% in December.
However, inflation could go higher than expected.
Fed officials are projecting PCE inflation could go higher this year than the last forecast, from 3.1% to 3.3%.