Federal Reserve Chair Jerome Powell hinted the US central bank’s latest interest-rate increase could be the last one, but stopped short of declaring victory on its battle against rapid price increases.
(Bloomberg) — Federal Reserve Chair Jerome Powell hinted the US central bank’s latest interest-rate increase could be the last one, but stopped short of declaring victory on its battle against rapid price increases.
Powell left the door open for officials to keep raising borrowing costs if inflation remains more stubborn than they expect, and pushed back strongly against market expectations that the Fed will be cutting rates by year-end.
The Fed chief said there was strong support for raising rates by 25 basis points at their two-day meeting this week. But he suggested officials may pause their tightening campaign in June to assess how the US economy is responding to tighter credit conditions resulting from higher interest rates and recent stress in the banking sector.
“Assuming the data come in with their forecasts, then we’ve seen the last of the rate hikes,” said Mark Zandi, chief economist for Moody’s Analytics. “The bar for them to raise rates again any time soon is high.”
Policymakers lifted interest rates for the 10th time since early last year, bringing the Fed’s benchmark rate above 5% from near zero levels last year. The Federal Open Market Committee said in a statement issued after the meeting that it “will closely monitor incoming information and assess the implications for monetary policy.”
It also omitted a line from its previous statement in March that said the committee “anticipates that some additional policy firming may be appropriate.” Instead, the FOMC will take into account various factors “in determining the extent to which additional policy firming may be appropriate.”
“There is a moderate tightening bias but I think this is what you would expect if they were going to go on pause for a while,” said Kathy Bostjancic, chief economist for Nationwide. “It gives them flexibility if they do need to raise rates again.”
Close to the end
The tilt toward tightening could also prevent investors from interpreting a potential pause in rate increases as a sign that the Fed is getting closer to reducing rates.
Powell emphasized that the rate increase, which lifted interest rates to the highest level since 2007, had wide support. The vote was unanimous.
“Support for the 25-basis-point increase was very strong across the board,” Powell said Wednesday after Fed officials completed their two-day policy meeting. “People did talk about pausing but not so much at this meeting,” he said, but added that the Fed is “much closer to the end of this than to the beginning.”
Whether that rate will prove to be high enough to bring inflation back to the Fed’s 2% target will be an “ongoing assessment” based on incoming data, Powell said.
The Fed chief also pushed back strongly against investor expectations that officials would be cutting borrowing costs by year end, saying they expect inflation to decline slowly. “It will take some time,” he said. “And in that world, if that forecast is broadly right, it would not be appropriate to cut rates and we won’t cut rates.”
The message suggests officials will resist backing down on their inflation fight even if the US economy begins to falter under the weight of tighter credit conditions.
Powell said the Fed’s Senior Loan Officer Opinion Survey, a quarterly report that will be released Monday that policymakers got a glimpse of this week, is “broadly consistent” with what other data are showing. Banks had started tightening lending conditions last year, but the collapse of SVB and others have exacerbated that.
“Banking data will show that lending has continued to grow but the pace has been slowing,” he said.
Bank Stress
Rapid Fed tightening over the last year aimed at quelling inflation has put pressure on financial institutions, leading to the largest bank failures since 2008.
Four US banks have collapsed since early March, including First Republic Bank, which federal regulators seized this week. Powell called the resolution of First Republic an “important step toward drawing a line” under bank turmoil.
There are signs that stress remains.
What Bloomberg Economics Says…
“Bloomberg Economics expects the Fed to pause at the June meeting, by which time the labor market will be showing clearer signs of softening. We expect the Fed to hold rates at this peak level through 1Q24 as inflation comes down only very gradually.”
— Anna Wong and Stuart Paul (economists)
— To read more click here
The Fed had $155.2 billion of loans outstanding to financial institutions through the two backstop lending facilities in the week through April 26, compared with $143.9 billion the previous week, according to data published Thursday, for example.
Another troubled regional lender, PacWest Bancorp., is looking for a buyer, while also considering a breakup or a capital raise, Bloomberg News reported after the Fed meeting Wednesday.
Tighter credit conditions could limit how much higher interest rates will need to go to bring inflation back to the Fed’s 2% target, Powell said. Still, officials did not rule out the possibility that they might have to raise rates again.
Median forecasts released by Fed officials in March showed policymakers saw rates rising to 5.1% by year end, which implied officials could be done after the May rate increase. Those projections will be updated at the Fed’s June gathering.
“I think Powell was being true, very honest when he said that we haven’t made any decision about whether we’re going to pause yet,” Former New York Fed President William Dudley said in an interview on Bloomberg TV. “They think that the probability is higher that they’re going to pause, but they haven’t actually got there yet.”
–With assistance from Craig Torres, Catarina Saraiva and Steve Matthews.
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.