The Federal Reserve is struggling, seeking to balance the concerns of the economy with a potential banking crisis.
From CNBC. The Federal Reserve on Wednesday approved its 10th interest rate increase in just a little over a year and dropped a tentative hint that the current tightening cycle is at an end.
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In a unanimous decision widely expected by markets, the central bank’s Federal Open Market Committee raised its benchmark borrowing rate by 0.25 percentage point. The rate sets what banks charge each other for overnight lending but feeds through to many consumer debt products such as mortgages, auto loans and credit cards.
The increase takes the fed funds rate to a target range of 5%-5.25%, the highest since August 2007.
Markets, though, are more focused on whether the Fed will pause here, particularly with lingering concerns over economic growth and a banking crisis that has rattled nerves on Wall Street. …
During Wednesday’s news conference, Chairman Jerome Powell said “a decision on a pause was not made today” but noted the change in the statement language around future policy firming was “meaningful.”
The post-meeting statement had only offered some clarity on the future pace of rate hikes — and not by what it said but what it didn’t say. The document omitted a sentence present in the previous statement saying that “the Committee anticipates that some additional policy firming may be appropriate” for the Fed to achieve its 2% inflation goal.
The statement also tweaked language to outline the conditions under which “additional policy firming may be appropriate.” Previously, the FOMC had framed the forward guidance around how it would determine “the extent of future increases in the target range.” …
‘Tighter’ credit for households
Wednesday’s decision comes amid U.S. economic fragility and over the objections of prominent Democratic lawmakers, who urged the Fed this week to stop rate hikes that they insisted could cause a recession and excessive loss of jobs.
However, the labor market has remained strong since the increases started in March 2022. At the same time, inflation is still well above the 2% target that policymakers consider optimum. Multiple officials have said rates probably will need to stay elevated even if the hikes are put on hold. …
Along with inflation, the Fed has had to deal with tumult in the banking industry that has seen three mid-size banks shuttered.
Though central bank officials insist the industry as a whole is stable, an expected tightening in credit conditions and heightened regulations ahead are expected to weigh further on economic growth that was just 1.1% annualized in the first quarter. …
The Fed’s own economists at the March FOMC meeting warned that a shallow recession is likely due to the banking issues. …
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(Excerpt from CNBC. Photo Credit: Canva)