Fed pauses interest rate hikes after a year, but signals more tightening to come

Jerome Powell
Federal Reserve Board Chair Jerome Powell speaks during a news conference at the Federal Reserve, Wednesday, May 4, 2022, in Washington. The Federal Reserve intensified its drive to curb the worst inflation in 40 years by raising its benchmark short-term interest rate by a sizable half-percentage point. (Alex Brandon/AP)

Fed pauses interest rate hikes after a year, but signals more tightening to come

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The Federal Reserve announced Wednesday that it is pausing its interest rate hikes, showing that officials believe they are having success in bringing down inflation.

Following a two-day meeting of its monetary policy committee in Washington, D.C., the central bank announced that it would not be increasing its interest rate target — but officials indicated the pause will be a temporary one. The vast majority of economists and investors anticipated such a pause in rate hikes, which comes as inflation keeps slowing.

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The central bank’s key overnight rate target will remain at 5% to 5.25%. Rates are still the highest they have been since 2007, at the outset of the global financial crisis.

The Fed’s updated projections showed that Fed officials expect two more rate increases over the next year, more than penciled in during the spring. That update came as a surprise for some Fed watchers.

During a Wednesday news conference, Fed Chairman Jerome Powell noted just how much the Fed has raised rates over the past year. He pointed out that the effects of the central bank’s tightening have yet to be entirely felt.

“In light of how far we’ve come in tightening policy … today we decided to leave our policy interest rate unchanged,” Powell said. “Looking ahead, nearly all committee participants view it is likely that some further rate increases will be appropriate this year to bring inflation down to 2% over time.”

The move comes against the backdrop of elevated recession odds. It also comes amid ongoing volatility in the financial sector following Silicon Valley Bank’s failure about three months ago and upheaval in the housing market.

The pause is a signal that the central bank is beginning to see an economic slowdown and threats to the economy as potentially larger threats to the economy than too-high inflation. It also indicates that the Fed is growing more confident in signs that inflation is meaningfully slowing, which has been the goal of the barrage of rate revisions over the past year or so.

On Wednesday, the officials updated their projections for inflation. The median Fed official now sees inflation, as gauged by the personal consumption expenditures index, at 3.2% by the end of the year, compared to a March projection of 3.3%.

The Fed also changed its forecast for the unemployment rate in the coming months and years. It now predicts the unemployment rate will tick up to 4.1% by the end of this year, versus 3.7% today, an acknowledgment of the effects its tightening will have on the economy.

The committee members additionally revised up their GDP predictions for this year from 0.4% to 1% growth, indicating growing confidence that the economy could avoid some of the worst effects of the rate revisions.

This month’s Federal Open Market Committee meeting coincided with two major inflation reports, both of which bolstered confidence that the Fed would pause on Wednesday.

The consumer price index showed a 4% annual rate of inflation in May, down from 4.9% the previous month. The annual CPI inflation rate has been trending down since peaking last June and is now running at the lowest level since March 2021, right around when the country’s inflationary troubles first started bubbling up.

Additionally, inflation fell to a 1.1% annual rate in May, as measured by the producer price index, which gauges the wholesale prices of goods, which are eventually passed down to consumers.

While the labor market is still surprisingly strong, given the rate hikes, there are a few signs that it is softening — something that while bad for job seekers, does further ease inflationary pressure and is something that the Fed had hoped to see.

The economy once again beat expectations in May and added another 339,000 jobs. Still, the unemployment rate rose from 3.4% to 3.7%. Additionally, average hourly earnings growth decelerated in May.

Meanwhile, the banking sector is still under the microscope following the sudden failure of SVB in March. SVB’s downfall acted as a bit of a domino and led to a few other bank collapses, as well as some regional banks seeing their stock values plunge.

The federal government was able to step in and stymie the worst of the fallout, although economists are still closely watching the banking system, given the overall volatility of the economy amid the Fed’s rate hiking.

Also, while the broader economy is not in a recession, many experts contend that the housing market is. Home prices are falling, a sign of just how much the market has cooled since its red-hot zenith in 2020 when the Fed slashed rates to near-zero and mortgage rates fell in response.

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As of Wednesday, the average rate on a 30-year, fixed-rate mortgage was 6.71%, according to Freddie Mac. That number is up from a recent low of just under 6.1% registered in early February and up from about 3.1% at the start of last year.

© 2023 Washington Examiner

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