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US Fed Announces 25 Basis Point Rate Hike Taking Interest Rate Above 5%
On Wednesday, May 3, the US Federal Reserve (Fed) announced its 25 basis point rate hike, the 10th consecutive one in just over a year’s time. Although the announcement was in line with the Street expectation, the US equity market reacted negatively with all three indices ending in the red.
Fed Announces Another Rate Hike
The central bank’s Federal Open Market Committee unanimously agreed to raise its benchmark borrowing rate by 0.25 percent. This increase takes the Fed’s fund rate to the target range of 5%-5.25%, which is the highest since August 2007.
However, the focus for the markets at this point is whether the Fed will stop here or continue with further rate hikes. Concerns over economic growth and a looming banking crisis have already rattled investors.
During Wednesday’s press conference post the FOMC meeting, Fed Chairman Jerome Powell said that they haven’t made any decision on the pause, however, noted the change in the language for the future policy firming as “meaningful”. The post-meeting statement from the Fed chairman gives some hints about the future actions of the US central bank. Analysts are expecting that this could be the last rate hike in this entire monetary tightening season.
Furthermore, the statement tweaked the language by outlining the conditions under which “additional policy firming may be appropriate”. Previously, the FOMC had framed the forward guidance wherein it would determine “the extent of future increases in the target range”.
The statement also reiterated that the Fed “will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments”.
Recession and ‘Tighter’ Credit for Households
Amid the banking crisis emerging in the market, the US economic environment looks extremely fragile. As a result, some of the prominent democratic lawmakers had also urged the Fed to stop rate hikes this week citing concerns of a probable recession and excessive loss of jobs.
The good thing is that despite this macro fragility, the labor market has shown strength over the last year. On the other hand, inflation is still much above the 2% target, as considered optimum by policymakers. Analysts expect that even if the Fed pauses on rate hikes, interest rates will continue to stay elevated for quite some time. Speaking to reporters, Powell said:
“Inflation has moderated somewhat since the middle of last year, nonetheless inflation pressures continue to run high and the process of getting inflation back down to 2% has a long way to go.”
Along with inflation, the Fed has another challenge of handling the looming crisis in the mid-sized US banks. The overall take from yesterday’s FOMC meeting is economic growth has been “modest” while “job gains have been robust” and inflation is “elevated”. Quincy Krosby, chief global strategist at LPL Research told CNBC:
“Although the FOMC statement is slightly more dovish by what it left out from the last statement, it nonetheless makes it clear that the Fed remains data dependent as it acknowledges that inflation remains elevated but underscores that it wants to monitor the cumulative effects of its aggressive rate hike campaign.”
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US Fed Announces 25 Basis Point Rate Hike Taking Interest Rate Above 5%
