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The Fed tightens its grip on inflation and the economy with its tenth — possibly final — rate hike


The Federal Reserve once again increased pressure on inflation – and the economy – for what could be the last rate hike of its current campaign.

The central bank raised its benchmark interest rate for the tenth time this cycle by a quarter point to a range of 5% to 5.25% on Wednesday. The widely expected move pushed interest rates to a new high since 2007.

The Fed’s policy committee said its next actions will be guided by data on inflation and the health of the economy, leaving open the possibility of keeping interest rates on hold at its next meeting in June.

“In determining the extent to which additional policy tightening may be appropriate to return inflation to 2% over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation , and economic and financial developments,” the central bank said in a prepared statement.

Central bankers dropped the language they had used in the previous statement to achieve “sufficiently restrictive” monetary policy in future interest rate hikes.

High interest rates had the intended effect of increasing the cost of borrowing for all types of debt (including consumer credit such as credit cards and car loans) and discouraging borrowing and spending, especially for things normally bought on credit, such as houses.

Federal Reserve Chairman Jerome Powell noted that rising interest rates, combined with a growing reluctance of banks to lend money, is reducing inflation and slowing the economy. This could usher in a possible pause in rate hikes.

“In light of these uncertain headwinds, along with the restraint on monetary policy that we have put in place, our future policy actions will depend on how events unfold,” Powell told a news conference.

He did not rule out future rate hikes, saying the bank was “ready to do more if tighter monetary policy is warranted.”

Stocks fell during Powell’s news conference after he said he expected inflation to fall slowly and the Fed would have to keep rates high for some time.

The Federal Reserve has been steadily raising interest rates since March 2022 on the theory that the drop in spending will give supply and demand a chance to rebalance from the pandemic-related surge in the cost of living. The annual rise in the consumer price index cooled from its peak of 9.1% in June 2022 to 5% in March, closer to the Fed’s 2% target — and the economy also felt the cooling.

Economic growth, as measured by gross domestic product (GDP), has sputtered under the weight of rising interest rates. The previously abundant job market also began to falter as employers pulled out of open positions.

Further interest rate hikes designed to tackle high inflation altogether could tip the economy into recession, helped by banks curbing lending in response to ongoing turmoil in the financial system, economists said.

Economic forecaster Robert Fry, former chief economist at DuPont, said the Federal Reserve has probably raised its interest rate as high as it can go, and its next rate move will be downward.

“I think they intend to keep them here for a long time, but I think once it becomes clear to everybody that we’re in a recession, I think the pressure on them to cut rates is becoming too much for them to resist,” Frye said .

For consumers, the latest increase in interest rates makes certain types of loans even more expensive and saving more attractive. While average interest rates offered on savings accounts and certificates of deposit have lagged behind the Fed’s increases, some banks are offering higher rates. Savvy savers can get a good deal by shopping around.

For rates on things like mortgages, the biggest impact will come from how the economy reacts to rising rates, said Tom Graf, chief investment officer at Facet.

Long-term interest rates could rise further if the economy avoids recession, but could fall in the event of an economic downturn in the coming months, which could prompt the central bank to reverse course and start cutting rates.

“It’s not so much about what the Fed does today, but how does what the Fed does today affect where the economy is going to be 3, 6, 12 months from now?” Graff said.

Joanna Swanson

Joanna Swanson is Europe correspondent at the Thomson Reuters Foundation based in Brussels covering politics, culture, business, climate change, society, economies and inclusive tech. With specific focus in breaking news, she has covered some of the world's most significant stories.