Federal Reserve Raises Key Interest Rate to 5.25%, Tenth Straight Hike under Powell’s Watch

The Federal Reserve announced on Wednesday its decision to raise its key interest rate for the 10th consecutive time, with the benchmark rate now reaching a range between 5% and 5.25%. This increase is the highest level since 2007 and marks the most aggressive rate-hiking regime since the 1980s. The move is part of the Fed’s ongoing effort to crush inflation, but the body has also indicated that it may pause its current rate-hiking regime to assess the impact of monetary tightening on the US economy.

Federal Reserve seeks to combat inflation

Higher interest rates act on inflation by making it more expensive for businesses and consumers to borrow money, which slows down economic activity. The Fed’s decision to continue hiking interest rates has been met with mixed reactions. While some economists have called for a pause in the rate-hiking regime to avoid pushing the economy into a recession, others have supported the Fed’s efforts to combat inflation.

In a statement issued on Wednesday, the Federal Open Markets Committee indicated that this could be the last increase, deleting a reference to “future increases” that appeared in prior statements. The committee noted that “Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring and inflation,” and that it will assess the impact of monetary tightening before making any further decisions.

Fed Chair emphasizes commitment to lowering inflation

Fed Chair Jerome Powell emphasized the Fed’s commitment to lowering inflation from the current annual rate of 5% to the bank’s target of 2%. In a news conference on Wednesday, Powell warned that it will take some time for inflation to come down and that it would not be appropriate to cut interest rates in the near future.

“In that world, if that forecast is broadly right, it would not be appropriate to cut rates,” Powell said.

The banking sector remains sound and resilient

The failure of First Republic Bank over the weekend and its subsequent acquisition by JPMorgan Chase sent tremors through the financial markets, marking the third bank failure since March and the second-largest in US history. However, Fed Chair Jerome Powell sought to calm concerns about the financial sector in a news conference on Wednesday, stating that the banking industry “is sound and resilient.”

Powell acknowledged that the strains that emerged in the banking sector in March resulted in tighter credit conditions, which are likely to weigh on economic activity, hiring, and inflation. However, he also noted that the future policy actions of the Fed will depend on how events unfold.

Conclusion

The Federal Reserve’s decision to continue its rate-hiking regime has sparked debate among economists and policymakers. While the Fed’s efforts to combat inflation have been praised by some, others have expressed concern about the impact of higher interest rates on economic activity. However, with the Fed indicating that this could be the last increase, it remains to be seen how the economy will be affected by the current regime. Nonetheless, the Fed’s commitment to lowering inflation and ensuring the soundness and resilience of the banking sector has been emphasized by Fed Chair Jerome Powell, providing some reassurance for investors and the public.