Fed hikes interest rates 0.25 percentage point but signals pause in inflation fight

WASHINGTON − The Fed’s most aggressive rate-hiking campaign in 40 years may be history.

The Federal Reserve raised its key short-term interest rate by a quarter percentage point Wednesday and signaled it could now pause if inflation continues to ease as expected.

In a statement after a two-day meeting, the central bank removed previous guidance that “some additional policy firming (rate hikes) may be appropriate” to lower yearly inflation to its 2% target.

Instead, it said its policymaking committee “will closely monitor incoming information and assess the implications for monetary policy.

“In determining the extent to which additional policy firming may be appropriate to return inflation to 2% over time, the Committee will take into account” its rate hikes so far, the lags with which they affect the economy and inflation, and “economic and financial developments.”

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The central bank stopped short of stating that rates are probably high enough to lower annual inflation to the Fed’s 2% target, as some economists anticipated. That likely would have been a more emphatic preference for a pause.

Still, if inflation and the labor market show signs of cooling down sufficiently by the Fed’s mid-June meeting, as many economists expect, Fed officials appear inclined to halt the rate increases.

Otherwise, they could bump up rates again despite the growing risk that the moves will trigger a mild recession later this year.

"Our future policy actions will depend on how events unfold," Fed Chair Jerome Powell said at a news conference. "We are prepared to do more if greater monetary policy restraint is warranted."

Powell added the Fed didn't formally decide to pause its rate hikes. But he pointed to the deletion from the statement of the guidance that further rate increases may be appropriate.

"That's a meaningful change, that we're no longer saying we anticipate" more hikes.

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What happens to home prices?:How will the housing market be affected with the Federal Reserve interest rate hike?

The Fed repeated that it will also consider the effects of the Silicon Valley Bank crisis, which has prompted banks to tighten lending standards and that’s likely “to weigh on economic activity, hiring and inflation. The extent of these effects remains uncertain.”

In other words, if it’s tougher for consumers and businesses to borrow, that could lessen the need for more rate increases.

"In principle, we won't have to raise rates quite as high as we would have if (the banking crisis) hadn't happened," Powell said.

So has the central bank reached its peak interest rate?

"We may not be far off and are possibly even at that level," he said, adding that will depend on how economic activity and inflation evolve.

Although most economists − and the Fed's staff − believe the rate increases will tip the economy into a mild recession this year, Powell said hiring is still so strong it's possible to cool the labor market enough to bring down inflation without triggering a downturn.

"The case for avoiding a recession is, in my view, more likely than having a recession," he said.

Economy's growth cools:Economy grew 1.1% in first quarter but a recession could begin soon as high rates bite

What is the Fed interest rate now?

Wednesday’s hike raises the key rate to a range of 5% to 5.25%, the highest in 17 years. And the Fed got there in near-record time, hoisting the rate from near zero in March 2022 as it sought to beat back inflation that also reached a four-decade high last June as the economy continued to emerge from the pandemic.

Although consumer price increases have softened since then, a “core” measure that strips out volatile food and energy items has climbed more than expected this year. That prompted futures markets to predict the Fed would lift rates as high as 5.6% in 2023.

But the March failures of Silicon Valley Bank and Signature Bank have caused financial institutions to toughen lending standards and Fed officials have said that’s likely to slow the economy and inflation, leaving less work for them to do. This week, First Republic Bank collapsed as well.

Fed policymakers also may be hesitant to intensify strains in the financial system considering the rate hikes themselves fueled the crisis by causing big losses at some regional banks heavily invested in rate-sensitive bonds, economists say.

As a result, the Fed in late March estimated 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. But Americans, especially seniors, are finally reaping higher bank savings yields after years of meager returns.

Is the job market slowing down?

The Fed is trying to walk a fine line as it digests conflicting economic signals. Although March’s 236,000 U.S. job gains were sturdy, monthly payroll increases have slowed significantly from early this year. And the April employment report, due out Friday, is projected to reveal another downshift to180,000 new jobs, according to economists’ estimates.

Job openings declined to 9.6 million in March, a historically elevated total but the lowest in nearly two years, the Labor Department said Tuesday. And since the labor force – which includes people working and job hunting -- has swelled by nearly 2 million people so far this year, the number of vacancies per unemployed worker dropped to 1.6.

That’s still high but it’s the lowest level since fall 2021 and marks a step toward a better balance between job openings and workers, a goal the Fed is seeking to slow pay increases that may be compounding inflation.

How is the U.S. economy right now?

Other barometers of economic activity are also moderating, largely due to the rate increases. The nation’s gross domestic product grew at a modest 1.1% annual rate in the first quarter. Consumer spending, which makes up 70% of GDP, increased by a more robust 3.7% but outlays have lost steam since a weather-related surge in January. Manufacturing output also has declined.

A pullback in consumer demand and hiring theoretically should curb inflation but price increases have drifted down just gradually.

Will inflation go down in 2023?

Even as an overall inflation gauge tumbled to 4.2% in March from a peak of 7% in June, the Fed’s preferred measure of core inflation stayed high at 4.6%, according to a government report last week. And a separate report revealed that employee wage growth accelerated slightly in the first quarter.

Does the Fed plan to raise interest rates again?

Barclays says the Fed could hike again in June if job growth this month tops 200,000 and core inflation increases by about 0.3% or more.

On the other hand, the central bank is unlikely to cut rates this year, as markets expect, even in the event of a mild recession, Barclays says. It would take a “broad-based financial crisis” or “a very significant shock that hits the economy” to coax the Fed into trimming rates, the research firm says.

Powell said Wednesday that Fed officials believe inflation won't come down quickly, adding, "In that world... it would not be appropriate to cut rates." Fed forecasts don't foresee a move to lower rates until 2024.

Some economists disagree.

"We expect economic weakness and a sharper-than-expected drop back in core inflation to convince officials to start cutting rates again later this year," economist Andrew Hunter of Capital Economics wrote in a note to clients.

 S&P 500, Dow Jones and Nasdaq retreat

Major indexes closed in negative territory after the Federal Reserve raised interest rates by a quarter of a percentage point and Powell said the central bank would monitor the impact of the central bank's increases before determining its next course of action.

The S&P 500 closed down 0.70%, the Dow Jones Industrial Average 0.80% and the Nasdaq 0.46%.

Jessica Guynn

What is the Bitcoin price after Powell speech?

The Bitcoin price dropped slightly in response to Powell’s speech but remained essentially flat between $28,000 and $28,500, mostly hovering around $28,375.

Despite a surge following the collapse of Silicon Valley Bank, Bitcoin is down substantially from its high in November 2021. Ethereum, the second-largest cryptocurrency, has also struggled.

Jessica Guynn

What are the best interest rates on CDs?

CD rates have been soaring as the Federal Reserve raises interest rates. Will the latest interest rate hike help you earn even more on your cash savings?

The best CD rates are exceeding 4.30% annual percentage yields for six-month through five-year terms.

But with this rate hike possibly being the last for a while, CD rates are expected to level off and may even fall later this year.

Jessica Guynn

Fed meeting calendar

The Fed's next meeting is June 13-14. Here's a schedule of the remaining meetings for the year:

  • July 25-26
  • September 19-20
  • Oct/Nov 31-1
  • December 12-13

When does the Fed meet to talk rates?The Federal Reserve's 2023 schedule

Fed minutes

Several weeks after every Fed meeting, it releases what's known as the minutes, a more detailed account of what led the Fed's voting members to their decision on interest rates, as well as a summary of what all was talked about during their two-day meeting. Occasionally, the minutes also give a glimpse of what to expect at the Fed's next gathering.

You can read the last meeting's minutes here.

Minutes from the April meeting should be released in roughly three weeks.  

When does the Fed meet to talk rates? The Federal Reserve's 2023 schedule

How many Federal Reserve banks are there?

There are a dozen, and they collectively have twenty-four branches.  

How many banks have failed in 2023?

Three FDIC-insured banks, Silicon Valley Bank, Signature Bank and most recently First Republic, have collapsed this year. The FDIC took over SVB and Signature and federal regulators said they would guarantee all depositors, even if their account balances were above the $250,000 limit the FDIC promises to insure. Meanwhile, First Republic was seized Monday and sold to JP Morgan Chase which will incorporate all First Republic accounts and purchase most of that institutions’ assets.

Fed rate hike history

At the Fed's last meeting held March 21 and 22, interest rates inched up 0.25 percentage point to a range of 4.75% to 5%.

The spate of hikes are in sharp contrast to the height of the COVID-19 pandemic when rates hovered near zero as the economy largely ground to a halt. In March 2022, the rate was bumped up to a quarter percentage point. In May, it increased by 0.50 percentage point, followed by four hikes in a row of 0.75% percentage point each. The last hike of 2022 was half a percentage point.

What is the prime rate?

The prime rate sets the level of interest consumers with the best credit pay when they borrow from a commercial bank. It's linked to the Federal Reserve which establishes the overnight rate for federal funds. That rate then serves as the basis for the prime rate, which stood at 8% on Wednesday.

Will Fed raise rates again?

The Federal Reserve is expected to boost its key short-term interest rate 0.25 percentage point today in its ongoing effort to curb inflation.

Good news coming? Fed may hint at a pause in inflation fight

Fed rate hike's impact: This is how a Fed rate hike could affect you

When is the next Fed rate decision?

The next Fed interest rate decision will be on June 14th.

Fed meeting housing rates

Homeowners who currently have fixed-rate mortgages won’t see any changes. Those who’ve recently purchased a home or are now house hunting are feeling the pinch of higher rates. But mortgage rates have been volatile and are down from their 2023 peak of 6.73% in early March. As of last week, the average rate was 6.43%. 

The Fed can impact mortgage rates but doesn’t directly set them, so even with a rate increase, home loan costs may not rise. The expected rate hike on Wednesday has already lifted the cost of a new average 30-year mortgage by $11,160 over the life of the loan, as rate hikes are usually priced into mortgage rates in advance, according to WalletHub.

Housing:With federal reserve interest rates set to rise, how will the housing market be affected?

Federal Reserve Board Chairman Jerome Powell speaks during a news conference after the Federal Reserve announced that it would raise interest rates by a 0.5 percentage point to 4.5.

Bank failures in 2023

First Republic was the third bank failure in two months, overtaking Silicon Valley Bank as the second biggest bank collapse in U.S. history.   

SVB’s collapse occurred when struggling tech companies with accounts began taking their money out to cover their expenses, leading SVB to sell bonds that were now worth less because of the Fed’s string of rate hikes. The bank run then accelerated as customers with deposits greater than $250,000, which aren't FDIC insured, rushed to withdraw their money amid SVB's capital losses.

Similar bank runs led to the failure of Signature Bank, which played a key role in the cryptocurrency industry, and put First Republic Bank in jeopardy. First Republic received $30 billion in deposits from JPMorgan Chase and 10 other big banks to keep it afloat but ultimately saw its share price plummet when its quarterly results showed depositors had withdrawn over $100 billion. Regulators seized the bank Monday and sold its accounts and most of its assets to JP Morgan Chase. 

Federal regulators also intervened with SVB and Signature banks, taking the unusual step of backing all their deposits including those the FDIC was not obligated to insure because they were greater than $250,000. They also created a lending facility that would enable other regional banks to borrow money to cover withdrawals by uninsured depositors if needed.

A Federal Reserve report noted that lax oversight by regulators contributed to SVB’s failure. 

Bank failures: How often do they happen?

SVB lobbied Congress for less regulation: Signature Valley Bank wanted fewer regulations  

Student loan borrowers vs. SVB depositors:Who deserves a bailout?

First Republic Bank

First Republic Bank became the second biggest bank failure in history when federal regulators seized the institution on Monday and JP Morgan Chase committed to acquiring the bank’s customer accounts and most of its assets. 

First Republic had been on shaky ground after the failures of SVB Bank and Signature Bank in March, with account holders and investors worried that it might meet a similar fate since it also had a large number of uninsured deposits. First Republic had also been a major lender to the wealthy, granting them low interest loans that were now of little value. 

Eleven larger banks attempted to come to First Republic’s rescue last month, giving it $30 billion. But First Republic revealed in its quarterly report that depositors had withdrawn over $100 billion, a bank run that was accelerated by the ease with which panic can spread through social media. 

Investors fled, sending the bank’s shares plunging 75% last week with the  stock price down to $3.51 at the close of markets Friday. 

First Republic Bank sold: The bank was seized by federal regulators and sold to JP Morgan  

Charisse Jones and Associated Press

What is the rate of inflation?

Inflation slowed in March, according to a measure favored by the Fed, with consumer prices rising 4.2% as compared to the same month a year ago, which was the smallest uptick since May 2021, according to the Commerce Department. March prices fell from 5.1% the previous month and 7% in June which marked a four-decade high.

Core prices, which don’t count volatile items like food and energy and so offer a clearer snapshot of longer trends, rose 0.3%, lowering the annual increase to 4.6%. That was down from 4.7% in February, a revised figure that ticked upward.

Inflation eases: The Fed may slow rate hikes after inflation eases in March

Powell talks inflation: Fed chair testifies before Senate on inflation, speeding up rate hikes

Economy grew but a recession may still loom:The nation's GDP rose slightly, but high interest rates could still trigger recession

Interest rates today

The Fed’s rate hike in March lifted its federal funds rate to a range of 4.75% to 5%. Today’s anticipated hike would lift the rate to a range of 5% to 5.25%.