The central bank raises rates, opening the door to a pause in the tightening cycle

WASHINGTON, May 3 (Reuters) – The Federal Reserve shifted its management of the post-pandemic economic recovery to a new phase on Wednesday, likely the last of a historic series of interest rate hikes and a heightened focus on debt and other economic risks. .

The US Federal Reserve raised its overnight interest rate by a quarter of a percentage point to 5.00%-5.25%, as expected by financial markets. An increase is required.

The change does not preemptively prevent the central bank’s policy-making committee from raising rates again when it meets in June, but Fed Chairman Jerome Powell said it was now an open question whether further increases were warranted in an economy facing still high inflation. Shows signs of recession and risks of severe credit crackdown by banks on horizon.

Powell said the endpoint of rate hikes, which raised the central bank’s policy rate by a full 5 percentage points in 10 meetings through March 2022, is a bad pace for the central bank and one that may allow some time for the impact to be fully felt.

Using language reminiscent of the end of its tightening cycle in 2006, the central bank said that in “determining the extent to which additional policy stabilization may be appropriate,” officials will take into account how the impact of monetary policy accumulates in the economy.

Bottom line: Fed officials say the impact of the inflation and credit crunch is still building after both higher interest rates and the financial sector’s recent failure of three U.S. banks.

In a press conference following the report’s release, Powell said inflation remains the main concern, so it’s too early to say for sure that the rate hike cycle is over.

“We are ready to do more,” he said, adding that policy decisions would be taken “on a meeting basis” from June.

He also played down market expectations that the policy-making Federal Open Market Committee would cut rates this year, saying such a move was unlikely.

“Inflation isn’t going to come down that quickly, it’s going to take a while,” he told reporters, adding that “in that world, if that forecast is broadly correct, it’s not appropriate to cut rates” this year.

‘Soft Landing’

Powell, however, acknowledged that “policy is tight” and that the central bank has done enough on rates to make it possible that, especially with growing strains on the economy, banks’ credit tightening is likely to slow the economy more than expected. And the rest of the central bank hopes to avoid recession.

The central bank’s policy rate is now about the same as it was 16 years ago before a destabilizing financial crisis, and most central bank officials in March said it was “sufficiently restrained” to pull back inflation. 2% target by central bank. Inflation is currently more than twice the target.

Economic growth remains moderate, but “recent developments are likely to weigh on tighter credit conditions for households and businesses and economic activity, hiring and inflation,” the central bank said in its report.

Still, the Fed said job gains were “strong,” and Powell noted that some recent data on declining job prospects and lower earnings growth, combined with historically low unemployment, support the view that the economy will slow without a dramatic rise in unemployment.

“Avoiding a recession is more important in my view than having a recession,” Powell said.

Risks surrounding the US debt ceiling impasse between Republicans in Congress and Democratic President Joe Biden have added to 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 the Fed’s next two policy meetings.

US stocks were initially in gains after the release of the Fed report, but fell and closed lower in the afternoon. Yields on U.S. Treasuries fell sharply, while the dollar weakened against a basket of trading partners.

“What’s important to me is the single-word change, they believe they will determine whether future hikes are necessary, whereas last time they said they expected further rate hikes to be necessary,” Sam Stovall said. Chief Investment Strategist at CFRA Research “With the word ‘determine’ instead of ‘expect’, the Fed is now telling markets that it is on hold.”

Report by Howard Schneider; Editing by Paul Simao

Our Standards: Thomson Reuters Trust Principles.