WASHINGTON, May 3 (Reuters) – The Federal Reserve moved its handling of the post-pandemic economic recovery to a new stage on Wednesday in what was the end of a historic series of interest rate hikes and hikes. the attention of credit and other economic risks. .
The US central bank raised its benchmark overnight interest rate by a quarter of a percentage point to the 5.00%-5.25% range, as financial markets had expected, but in doing so fell short of its policy statement. language that says it “expects” more rate hikes.
The change does not foreclose the central bank’s policy-setting committee from hiking rates again when it meets in June, but Fed Chair Jerome Powell said it was an open question whether further increases are necessary in an economy still facing high inflation, but also showing signs of a slowdown and with risks of a tough credit crackdown on banks on the horizon.
“We’re getting closer, or maybe there,” Powell said of the final point of a rate hike that has raised the Fed’s policy rate by a full 5 percentage points in 10 meetings since March 2022, a strength central bank rate. and one that may now be permitted to allow some time for the effect to be felt fully.
Using language reminiscent of when it halted its tightening cycle in 2006, the Fed said that “in determining the extent to which further policy tightening may be appropriate,” officials will consider how the impact of monetary policy that accumulates in the economy.
Top of mind: inflation and the impact of a credit tightening Fed officials feel is still growing in the wake of two higher interest rates and a financial sector that has been shaken by the recent failure of three US banks.
In a press conference after the release of the statement, Powell said that inflation remains the main concern, and therefore it is too early to say with certainty that the cycle of rate hikes is over.
“We are ready to do more” he said, with policy decisions from June onwards to be made on a “meeting-by-meeting” basis.
He also pushed back on market expectations that the policy-setting Federal Open Market Committee would cut rates this year, saying such a move was unlikely.
“We in the committee have a view that inflation will come down not very quickly, it will take time,” he told reporters, and “in that world, if that forecast is largely correct, it should not be cut. rates” this year.
‘HIGH LANDING’
Powell, however, agreed that “policy is tight,” and said that it is possible that the central bank has made enough rates, especially given the growing strains on the economy, the possibility that the tightening of credit of banks may slow the economy more than expected, and the rest of the Fed hopes that a recession can be avoided.
The Fed’s policy rate is now roughly the same as it was on the eve of a destabilizing financial crisis 16 years ago, and is at a level that most Fed officials projected in March as essentially “constrained enough” to reverse inflation at the central bank’s 2% target. Inflation is currently more than double the target.
Economic growth remains moderate, but “recent developments are likely to result in tighter credit conditions for households and businesses and in the assessment of economic activity, hiring and inflation,” the Fed said in its statement.
Yet job gains were “solid,” the Fed said, and Powell noted that some recent data on falling job openings and low income growth, combined with historical low unemployment, supporting the idea that the economy can slow without a dramatic increase in unemployment.
“The case for avoiding a recession in my view is more likely than for a recession,” Powell said.
The risks surrounding a deadlock on the US debt limit between Republicans in Congress and Democratic President Joe Biden have increased the sense of caution about trying to further tighten fiscal conditions.
The change in the Fed’s approach was reflected in US interest rate futures, which showed broad expectations for no hike at either of the next two central bank policy meetings.
US stocks initially held on to gains following the release of the Fed statement, but fell later in the afternoon and closed lower. Yields on US Treasury securities fell sharply, while the dollar weakened against a basket of trading partner currencies.
“For me the key is a change in wording, saying that they believe they will determine whether future increases are necessary, whereas last time they said they expected more would be needed. rate hike,” said Sam Stovall, chief investment strategist at CFRA Research. “With the word ‘determine’ in place of ‘expect,’ (it) essentially tells the markets that the Fed is now on hold.”
Reporting by Howard Schneider; Editing by Paul Simao
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