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On Wednesday, the Federal Reserve increased interest rates by a quarter percentage point, marking a 14-month campaign against enduring inflation. With indications of a weakening job market and decelerating economic growth, experts predict this may be the last rate hike for the foreseeable future, as instability in the banking sector introduces new uncertainties.
The Fed alluded to this in their statement, omitting previous language about the probable necessity for additional rate hikes. The US economy is losing momentum, with banking troubles and other obstacles as contributing factors.
Over ten consecutive meetings, the Fed has elevated borrowing costs, bringing the benchmark rate to between 5 and 5.25%. This aligns with the Fed policymakers’ predictions from March regarding year-end rates. Despite inflation cooling since last summer, it remains over double the central bank’s 2% target.
March’s data showed a 4.2% increase in prices from the previous year, according to the Fed’s favored inflation metric. The “core” inflation rate, which excludes unstable food and energy prices, stood at 4.6%.
Signs of the Fed’s success in curbing inflation through aggressive rate hikes are emerging. Sectors like construction and manufacturing are particularly susceptible to borrowing costs and have slowed down. Consumer spending also decelerated significantly after a robust January.
Although unemployment remains near a 50-year low, the job market seems to be losing momentum. March saw the lowest job gains in over two years, and despite layoffs still being rare historically, they have started to rise.
Experts caution against further rate hikes, arguing they might jeopardize more jobs without effectively controlling prices. The recent banking turmoil also complicates the Fed’s decision-making process. Since the collapse of Silicon Valley Bank and Signature Bank in March, other lenders have become more hesitant to extend loans.
This decline in lending negatively impacts economic growth, much like increasing interest rates, but its effects are even more challenging to gauge and forecast. The Fed itself has contributed to the banking instability, with its forceful rate hikes diminishing the value of some bank investments.
A recent Fed report criticized its own supervisors for inadequate monitoring of Silicon Valley Bank, allowing issues to worsen until it was too late. The Fed’s vice chair for supervision, Michael Barr, acknowledged the policy choice made in 2019 and a shift towards lighter bank regulation. He pledged more rigorous oversight in the future, with Fed chairman Jerome Powell supporting his findings and recommendations for robust bank regulation.
