The Federal Reserve extended its year-long fight against high inflation on Wednesday by raising its key interest rate by a quarter-point.
The Fed also signaled that it is likely nearing the end of its aggressive series of rate hikes.
Driving the news: Fed officials forecast that they expect to raise their key rate just one more time – from its new level Wednesday of about 4.75 to 5 percent. That is the same peak level they had projected in December.
- The latest rate hike suggests that Chair Jerome Powell is confident that the Fed can manage a dual challenge: Cool still-high inflation through higher loan rates while defusing the financial upheaval in the banking sector through emergency lending programs and the Biden administration’s decision to cover uninsured deposits at two failed U.S. banks.
- Despite concerns that higher borrowing rates could worsen the turmoil that has gripped the banking system, the Fed said in a written statement that “The U.S. banking system is sound and resilient.”
- The central bank also warned that the financial upheaval stemming from the collapse of two major banks is “likely to result in tighter credit conditions” and “weigh on economic activity, hiring and inflation.”
- The Fed’s move to signal that the end of its rate-hiking campaign is in sight may also soothe financial markets as they continue to digest the consequences of U.S. banking turmoil and the takeover last weekend of Swiss bank Credit Suisse by its larger rival UBS.
Fed’s pivot: The Fed’s policy decision Wednesday reflects an abrupt shift. Early this month, Powell had told a Senate panel that the Fed was considering raising its rate by a substantial half-point.
- At the time, hiring and consumer spending had strengthened more than expected, and inflation data had been revised higher.
- The Fed’s benchmark short-term rate has now reached its highest level in 16 years.
- The new level will likely lead to higher costs for many loans, from mortgages and auto purchases to credit cards and corporate borrowing. The succession of Fed rate hikes have also heightened the risk of a recession.