The Federal Reserve, the US central bank, raised interest rates further on Wednesday evening to quell inflation. At the same time, the Fed hinted at a pause in the cycle of rate hikes that began in March last year.
The main Fed interest rate will rise by 0.25 percentage point, to a range of between 5 and 5.25 percent. The decision is in line with most analysts’ latest expectations.
The Fed Board continues to monitor inflation risks closely a statement released by the board. It states that further interest rate steps “may be appropriate”. It is therefore possible that this will be the last rate hike. At previous Fed meetings, the Fed was even more adamant about the need for further rate hikes. The next meeting of the Fed will take place in June.
Inflation still too high
The Fed, like the European Central Bank, which will make an interest rate decision on Thursday, has to deal with persistent inflation. In the US it was 5 percent on an annual basis in March. ‘Core inflation’, which filters out volatile energy and food prices, was 5.6 percent. The Fed aims for an inflation rate of 2 percent.
The interest rate hikes should lead to lower inflation. Higher interest rates make borrowing by citizens and businesses less attractive, which should slow down economic activity. Ultimately, this should also limit price increases.
Although the inflation target is still far from reach, the Fed is now marking time. This is mainly due to the ongoing unrest in the US banking sector. After the collapse of three regional banks – Silicon Valley Bank and Signature Bank in March, and First Republic last weekend – other US banks have become more cautious about taking risks. This automatically limits lending, making rate hikes less necessary.
Stress persists
The failure of the three banks is mainly due to their ill-preparedness for the Fed’s rate hikes. As a result, long-term investments they had made lost their value. The stress continued this week: shares of regional banks, such as California’s PacWest, lost many percentage points in value. The more the Fed raises rates, the more likely the turmoil is to escalate. According to the Fed, the US banking system is “strong and resilient”.
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