Despite turbulences in the banking sector, the Fed decided to stay the course and keep raising interest rates in its battle against inflation. Following a two-day meeting of the Federal Open Market Committee (FOMC), Fed chairman Jerome Powell announced a modest 0.25 percent hike on Wednesday, bringing the target range for the federal funds rate to 4.75 to 5.00 percent – the highest level since 2007.
The Fed was faced with a tough decision this month, as it was forced to balance the risks of further destabilizing the banking sector against the risks of letting inflation flare up again. In the end, the FOMC decided to stay the course, knowing that hitting the pause button on further rate hikes could have send the wrong message: one of alarm. By deciding on a moderate rate hike, the Fed attempts to convey confidence with respect to the banking crisis without further de-stabilizing the system.
There was a slight if notable change in tone, however, signaling that an end to this tightening cycle may be in sight. While previous FOMC statements said that the committee was anticipating that “further increases in the target rate” would be appropriate, this time around, the messaging was a lot more cautious. “Some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time,” the statement read, and the projections released on Wednesday indicate that the majority of FOMC members see just one more 25 basis point hike coming this year.
Fed Stays the Course Amid Banking TurmoilThe Fed also acknowledged that the banking crisis may actually help to bring down inflation, as the situation is likely “to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation.”
