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Federal Reserve Hikes Interest Rates by 0.25% and Suggests a Pause in Aggressive Campaign

Federal Reserve Raises Interest Rates and Hints at a Possible Pause in Aggressive Rate Hikes

On Wednesday, the Federal Reserve raised its benchmark interest rate by 0.25%, marking the fifth increase in its rate-hiking campaign. Markets are speculating that this may be the final increase in this series. The bank’s target for the fed-funds rate now stands at 5.0% to 5.25%, a level not seen since 2007.

In its statement, the Fed declared that it can continue to fight inflation, stating that the U.S. banking system is “sound and resilient.” However, it is still too early to estimate how banks potentially pulling back on lending could impact the economy and inflation. The statement indicates that this might be the last increase in the current series, as it no longer includes the phrase “the Committee anticipates that some additional policy firming may be appropriate” in order to bring the annual inflation rate down to the bank's 2% target. According to Fed Chair Powell, the banking system in the United States is strong and able to withstand economic pressures. He also emphasized the importance of learning from past experiences to prevent similar events from occurring in the future.

The Fed’s most aggressive rate-hiking campaign in 40 years may now be coming to an end. Following the latest increase, the Fed has signaled that it may pause if inflation continues to ease as expected. The Fed’s policymaking committee stated that they will closely monitor incoming information and assess the implications for monetary policy. The committee will also take into account the rate hikes that have been implemented so far, as well as the lags with which they affect the economy and inflation, and “economic and financial developments.”

The key rate now stands at a range of 5% to 5.25%, the highest it has been in 17 years. The Fed was able to raise the rate from near-zero in March 2022 as it attempted to beat back inflation, which reached a four-decade high last June as the economy began to recover from the pandemic. Although consumer price increases have slowed since then, a core measure that strips out volatile food and energy items has risen more than expected this year. This has led futures markets to predict that the Fed would lift rates as high as 5.6% in 2023.'

However, the March failures of Silicon Valley Bank and Signature Bank have caused financial institutions to tighten lending standards, and Fed officials have suggested that this will likely slow the economy and inflation, leaving less work for them to do. This week, First Republic Bank also collapsed. As a result, the Fed estimated in late March that it will raise its key rate to a peak of 5% to 5.25% and then pause.

The latest hike is expected to further slow economic activity as it drives up rates for credit cards, adjustable-rate mortgages, and other loans. However, Americans, especially seniors, are finally enjoying higher bank savings yields after years of meager returns.

In conclusion, the Federal Reserve has raised its benchmark interest rate by a quarter of a percentage point, and this could be the last increase in this series. The Fed is still committed to fighting inflation, but it is closely monitoring incoming information to determine the extent to which additional policy firming may be necessary. The latest hike is expected to slow economic activity further, but it may bring relief to savers who have been struggling with low yields for years.


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