The Federal Reserve raised interest rates by a quarter percentage point on Wednesday, concluding a 14-month campaign against persistent inflation. However, experts predict this could be the last rate hike for the foreseeable future as the job market weakens and economic growth slows down. The banking sector’s instability also introduces new uncertainties.
The Fed hinted at this in its statement, omitting the previous language about the probable necessity for additional rate hikes. The US economy is losing momentum, with banking troubles and other obstacles contributing factors.
The Fed has increased borrowing costs throughout ten consecutive meetings, bringing the benchmark rate to between 5 and 5.25%. This aligns with the Fed policymakers’ predictions from March regarding year-end rates. Despite inflation cooling since last summer, it remains over double the central bank’s 2% target.
According to the Fed’s favored inflation metric, March’s data showed a 4.2% price increase from the previous year. The “core” inflation rate, which excludes unstable food and energy prices, stood at 4.6%.
There are indications that the Fed’s aggressive rate hikes to curb inflation have been successful. Sectors like construction and manufacturing are particularly susceptible to borrowing costs and have slowed down. Consumer spending also decelerated significantly after a robust January.
While unemployment remains near a 50-year low, the job market is losing momentum. March saw the lowest job gains in over two years, and despite layoffs still being rare historically, they have started to rise.
Experts caution against further rate hikes, arguing that they might jeopardize more jobs without effectively controlling prices. The recent banking turmoil also complicates the Fed’s decision-making process. Since the collapse of Silicon Valley Bank and Signature Bank in March, other lenders have become more hesitant to extend loans.
This decline in lending negatively impacts economic growth, much like increasing interest rates, but its effects are even more challenging to gauge and forecast. The Fed has contributed to the banking instability, with its forceful rate hikes diminishing the value of some bank investments.
In a recent report, the Fed criticized its supervisors for inadequate monitoring of Silicon Valley Bank, allowing issues to worsen until it was too late. The Fed’s vice chair for supervision, Michael Barr, acknowledged the policy choice made in 2019 and a shift towards lighter bank regulation. He pledged more rigorous oversight in the future, with Fed chairman Jerome Powell supporting his findings and recommendations for robust bank regulation.