Fed hikes key rate but may pause
The Federal Reserve raised its key interest rate Wednesday by a quarter-point to the highest level in 16 years, the Associated Press reports. The Fed also signaled, however, a possible pause in its streak of 10 rate hikes, which have made borrowing for consumers and businesses steadily more expensive.
Having raised their key short-term rate by 5 percentage points since March 2022, the Fed has said it will now weigh a range of factors in “determining the extent” to which future hikes might be needed, assessing growth, inflation, and turmoil in the banking sector.
The collapse of three large banks in the past six weeks will likely cause other banks to tighten lending to avoid similar fates, which could also help slow the economy and cool inflation. Goldman Sachs estimates that a widespread pullback in bank lending could cut U.S. growth by 0.4 percentage points this year, which could be enough to cause a recession. In December, the Fed projected growth of just 0.5% in 2023.
The Fed’s rate increases since March 2022 have more than doubled mortgage rates and elevated the costs of auto loans, credit card borrowing, and business loans. Home sales have plunged as a result. The Fed’s latest move, which raised its benchmark rate to roughly 5.1%, could further increase borrowing costs.
The Fed has made it clear that it doesn’t think its string of rate hikes have so far sufficiently cooled the economy, the job market, and inflation. Inflation has dropped from a peak of 9.1% in June to 5% in March but remains well above the Fed’s 2% target rate.
Factors like rising rental costs, falling gas and energy prices, and moderating food costs are slowing inflation, while “core inflation” — which excludes volatile food and energy costs — has remained chronically high. According to the Fed’s preferred measure, core prices rose 4.6% in March from a year earlier, scarcely better than the 4.7% it reached in July.