The Federal Reserve strengthened its fight against high inflation on Wednesday by raising its key interest rate by a quarter point to the highest level in 16 years. But the Fed also indicated that it can now interrupt the series of 10 rate hikes that have made borrowing increasingly expensive for consumers and businesses.

in a

statement after the last policy meeting,

In a statement following its latest policy meeting, the Fed deleted a sentence from its previous statement that said further “rate hikes may be needed.” Future increases may be necessary. Speaking at a news conference, Chairman Jerome H. Powell said the Fed has yet to decide whether to suspend rate hikes. But he pointed to the change in the statement’s language as confirmation of that possibility. Powell said the Fed would continue to monitor the latest economic data to decide whether to pause its hikes. officials want to assess the impact effect on growth and inflation. The Fed chairman also emphasized his belief that the

Collapse of three major banks

in the past six weeks is likely to cause other banks to tighten lending to avoid a similar fate. Such credit cuts, he said, are likely to help slow the economy, cool inflation and lessen the need for the Fed to raise rates further. When asked if the Fed’s base rate was high enough to slow down the economy and curb inflation, Powell said: “We may not be far off or maybe even at that level. James Knightley, chief international economist at ING, said: suggested that with rapidly tightening credit conditions due to the recent bank stress, we believe this will be the peak for interest rates But if inflation were to accelerate, the Fed will not hesitate to resume interest rates, as they are determined to keep inflation ,” said Ryan Sweet, chief economist at Oxford Economics. “As such, there is a risk that the pause is temporary. In a statement following its latest policy meeting, the Fed said that while the banking system is sound and resilient, “the turmoil in the financial system could slow borrowing, spending and growth. It reiterated that the impact of withdrawal in bank loans remains uncertain.

The Fed’s rate hikes over the past 14 months have more than doubled mortgage rates, increased the cost of auto loans, credit card loans and business loans, and increased the risk of a recession. Home sales have plummeted as a result. The Fed’s latest move, which raised its benchmark rate to around 5.1%, could raise borrowing costs further.

In its statement and at Powell’s press conference on Wednesday, the Fed made it clear that it doesn’t think the series of rate hikes has sufficiently cooled the economy, the job market and inflation. Inflation has fallen from a peak of 9.1% in June to

5% in March

but remains well above the Fed’s target rate of 2%. Inflationary pressures remain high and the process of bringing inflation back to 2% has a long way to go, Powell said. The three banks that failed had bought long-term bonds that paid low interest rates and then quickly lost value when the Fed raised rates. At his press conference, Powell noted that a survey by the Fed showed that medium-sized banks were already boosting credit before the banking upheaval and have done so even more since the busts. four decades, and the rise in interest rates has contributed to the collapse of three major banks and turmoil in the banking sector. All three failed banks had bought long-term bonds that paid low interest and then quickly lost value when the Fed raised rates. Chairman Jerome Powell had said in March that a reduction in bank lending to strengthen their finances could act as the equivalent of a quarter-point rate hike to slow the economy. Wait, layoffs and job growth? How is the economy doing and will there be another recession?

Fed economists estimate that tighter lending due to bank failures will contribute to a mild recession later this year, increasing pressure on the central bank to suspend rate hikes.

The Fed is also now grappling with the threat of a long-term stalemate over the country’s borrowing limit, which determines how much debt the government can issue. Republicans in Congress are demanding massive cuts as the price of lifting the country’s borrowing ceiling.

Banks in crisis: what you need to know Goldman Sachs estimates that a widespread downturn in bank lending could reduce US growth by 0.4 percentage points this year. That could be enough to trigger a recession. In December, the Fed forecast growth of just 0.5% in 2023. Wall Street traders were also unnerved by Monday’s announcement of On Monday,

Treasury Secretary Janet L Yellen

warned

that the nation could default on its debt as early as June 1, unless Congress agrees to lift the debt limit before then. The debt limit determines how much the government can borrow,

and a first-ever US debt default could potentially lead to a global financial crisis. Republicans in Congress are demanding massive spending cuts as the price of lifting the borrowing ceiling. Powell reiterated his warning that no one should assume that the Fed can protect the economy from the potential short- and long-term effects of not paying our bills on time.

The Fed’s decision on Wednesday came against an increasingly cloudy backdrop. The economy appears to be cooling, with consumer spending remaining flat in February and March, indicating that many customers have become cautious in the face of higher prices and borrowing costs. Production is also weakening.

Even the surprisingly resilient labor market, which has held the unemployment rate near its 50-year low for months, is showing cracks. Hiring has slowed, the number of job openings has fallen, and fewer people are leaving their jobs for other, generally better-paying positions.

Unrest erupted again in the country’s banking sector after regulators seized and sold First Republic Bank over the weekend. It was the second-biggest bank failure in US history and the third major banking collapse in the past six weeks. Concerns among investors about whether other regional banks may suffer from problems similar to First Republic’s have sent shares sharply lower on Tuesday.

The Fed’s interest rate hike on Wednesday comes at a time when other major central banks are also tightening lending. European Central Bank President Christine Lagarde is expected to announce another rate hike on Thursday, after inflation data released Tuesday showed price increases ticking up last month.

Consumer prices rose 7% year-on-year in April in the 20 countries using the euro, compared with an annual increase of 6.9% in March.

While headline inflation in the United States has plummeted as the cost of gas and many goods has fallen, core inflation, excluding volatile food and energy costs, has remained chronically high. According to the Fed’s preferred measure, core prices rose 4.6% in March from a year earlier, the same as in December.

Rugaber writes for the Associated Press.