Federal Reserve Raises Interest Rates to 16-Year High as Battle to Tame Inflation Continues

The Federal Reserve announced Wednesday it was raising its key federal funds rate to more than 5% – its highest level in 16 years – as it continued to fight stubborn inflation.

IN statement when announcing the increase – the tenth in a row since March 2022 – the previous wording, which signaled that further increases are likely, was omitted.

While inflation remained elevated, higher borrowing costs for households and businesses “will likely take a toll on economic activity, employment and inflation,” the central bank said, adding that the extent of these effects “remains uncertain.”

He added that job gains had been “solid” in recent months and noted that the unemployment rate remained low.

In a statement emailed after the announcement, Bankrate’s chief financial analyst Greg McBride said this moment could prove to be “last call” for savers and anyone looking to take advantage of the banks’ attractive deposit deals.

“The yields of CDs with maturities of one year and more have peaked and now is the time to lock them in,” he said. “The slowing economy coupled with the Fed moving to the margins means that CD yields will soon start to fall.”

The latest decision comes at a difficult time as high prices, high interest rates and slowing growth appear to mean an economic slowdown.

Indeed, many consumers would agree that between inflation and tighter credit terms – and with no prospect of pandemic financial relief – this is the worst thing they’ve felt about their finances since the pandemic hit and turned everything upside down.

Federal Reserve Chairman Jerome Powell testified before the Senate Banking Committee on March 7.Win McNamee/Getty Images

However, as the Federal Reserve prepared to make its latest interest rate announcement, financial commentators still disagreed over how it should respond to economic conditions.

According to data from CME GroupWall Street investors were betting that the Fed would announce another 0.25% interest rate hike.

Others disagreed as to exactly how it all played out. In an emailed statement, Seema Shah, chief global strategist at Principal Asset Management, said that with inflation still elevated and sticky, and with the broad economic picture still looking “fairly solid,” the Fed would rather keep the extra rate than not. wandering around the table.

“Provided economic data slows only slightly, inflation remains elevated and banking sector volatility is reasonably contained, we believe a June rate hike is still possible,” she wrote. “Indeed, we believe there is a greater risk of an interest rate hike in June than what the market is currently pricing in.”

This is also largely the opinion of economists at Citigroup. In a note to clients published on Sunday, the group said it expects the Fed to strike a “hawkish” tone in its latest language announcing an expected rate hike – meaning inflation has yet to be brought under control and so interest rates need to stay elevated longer.

Citi analysts cite recent data on price levels, which are still higher than expected. The following chart from the Atlanta Federal Reserve illustrates this:

“Instead of signaling a pause, the commission will want to keep the possibility of further rate hikes,” Citi economists write. “In our baseline scenario, the Fed will raise interest rates by 25bp (0.25%) this week and again in June and July.”

These predictions have been countered elsewhere. As Wednesday approached, the chorus of voices calling for the Fed to hold on continued to grow. On Tuesday, Senator Elizabeth Warren, D-Mass., and Representative Pramila Jayapal, D-Wash., summoned Fed Chairman Jerome Powell stopped raising interest rates altogetherwarning that too many increases will cost a growing group of people their jobs.

“We believe that further raising interest rates would mean abandoning the Fed’s dual mandate of achieving both maximum employment and price stability, and showing little respect to small businesses and workers’ families who will be caught in a wreck,” they wrote.

Analysts at global financial services group Nomura have offered something of a compromise: while they predict the Fed will raise the interest rate by the expected 0.25%, they said it would turn out to be a “dovish hike” as central bankers would replace the previous wording that signaled additional hikes will be necessary when planning to adopt a more wait-and-see approach.

Perhaps the best summary of the economic crosswinds facing the Fed was found in an anonymous reply to the monthly report From Supply Management Institutewhich showed a slight increase in sentiment among manufacturers for April.

“We seem to be in a period of contradictions,” said a respondent, identified only as an executive at a metals company. “Business is slowing down, but in some ways it is not. The prices of some commodities are stabilizing, but others are not. The shortages of some products are over, others are not. One day there is uncertainty, but not the next. The next few months should provide answers – or not. It is difficult to forecast at the moment. ”

For Shah, dominant cross currents mean the worst of all.

“The most dangerous risk to financial markets right now is stagflation – the risk that the Fed will not tighten monetary policy enough to allow inflation to return later in the year,” she wrote.

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