ALBAWABA — The United States Federal Reserve went into a balancing act by raising its benchmark lending rate by a quarter point on Wednesday in an attempt to offset inflationary pressures and at the same time try to contain further upheaval in the banking sector.
The ninth hike since March 2022, which was in line with expectations, lifted the target range to 4.75-5.00 percent at the end of a two-day policy meeting, its highest level since September 2007.
The rate-setting Federal Open Market Committee said that future increases are not assured and will depend largely on incoming data, while expressing confidence in the overall system.
“The Committee will closely monitor incoming information and assess the implications for monetary policy,” the FOMC’s post-meeting statement said. “The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.”
Federal Reserve Chairman Jerome Powell said that the inflation fight was not over, even though the central bank signaled that it was likely nearing the end of its aggressive streak of rate hikes.
“We are committed to restoring price stability and all of the evidence says that the public has confidence that we will do so, that will bring inflation down to 2 percent over time. It is important that we sustain that confidence with our actions, as well as our words,” Powell said.
“The process of getting inflation back down to 2 percent has a long way to go and is likely to be bumpy,” Powell added.
The banking chaos has stoked fears the Fed could overcorrect the economy into a more severe recession that would in turn trigger more bank failures leaving prominent economists to urge the Fed to pause rate hikes.
Policymakers released their rate projections for the first time since December that expect the central bank’s interest rates hikes will peak at 5.1 percent by the end of 2023, which means that they expect one more quarter-point rate hike before they pause.
Powell said the central bank may still choose to carry out additional hikes if inflation remains high.
“Events in the banking system over the past two weeks are likely to result in tighter credit conditions for households and businesses,” the Fed chair said. “It is too soon to determine the extent of these effects and therefore too soon.”
Banks reducing their pace of lending at a time of high anxiety in the financial system would possibly act as the equivalent of an additional quarter-point rate hike, slowing the economy, Powell added.
Interest rates will likely remain higher for longer as officials brought their projected Federal funds rate up to 4.3 percent from 4.1 percent in 2024.
Fed officials are now projecting deeper cuts to the economy over the next two years.
Real gross domestic product is forecast to grow by 0.4 percent in 2023, down from earlier projections of 0.5 percent, officials said, while in 2024 GDP is expected to grow by 1.2 percent, slipping from the 1.6 percent projected in December.
Slowing down the economy also means unemployment will rise, the Fed predicts, with the unemployment rate rising to 4.5 percent by year’s end, up from 3.6 percent last month, possibly leading to over 1.5 million more Americans out of work by the end of 2023.
"We have to bring inflation down to 2 percent," Powell told CNN's Nicole Goodkind. "There are real costs to bring it down to 2 percent. But the costs of failing are much higher."
"If the central bank doesn't get inflation back in place... you can have a long series of years where inflation is high and volatile. And it's hard to invest capital. It's hard for an economy to perform well. And we're looking to avoid that," Powell added.
Inflation, meanwhile, could remain higher than expected, with Fed officials projecting that personal consumption expenditure inflation could edge up this year to 3.3 percent, rising 0.2 percent from the previous forecast.
Stocks fell sharply on Wednesday after the Fed reaffirmed its dedication to pushing down inflation, with the Dow falling about 532 points, or 1.6 percent, the S&P 500 slipping close to 1.7 percent and the Nasdaq Composite declining 1.6 percent.
“The probability of the Fed sticking the landing on this without causing a recession, increasing unemployment, and preventing further consolidation in the domestic banking sector would appear to be quite low,” Joe Brusuelas, principal and chief economist at RSM US, told Fox Business.