The Fed raises interest rates again in what could be its final attack on inflation
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Federal Reserve Chair Jerome Powell speaks during a news conference at the Federal Reserve in Washington, D.C, on March 22, 2023. The Fed raised interest rates again Wednesday but signalled it may be the last hike for a while.Olivier Douliery / AFP via Getty Images -
A person walks past a First Republic bank branch in Manhattan, New York City, on April 24, 2023. The lender was sold to JPMorgan Chase on Monday after a brief government takeover, becoming the third bank to fail this year.Spencer Platt / Getty Images
The Federal Reserve raised interest rates by another quarter percentage point Wednesday, extending its 14-month crackdown on stubborn inflation.
With signs of a softening job market and slower economic growth, this could be the central bank's last rate hike for a while, especially as turmoil in the banking sector raises new uncertainties.
The Fed hinted as much in a statement, dropping a line it used previously about the likely need for additional rate increases.
"I think we've moved a long way fairly quickly," Fed Chair Jerome Powell told reporters after the Fed announced its decision. "I think we can afford to look at the data and make a careful assessment."
The Fed has raised borrowing costs at ten consecutive meetings, pushing its benchmark rate to between 5 and 5.25%. On average, that's where Fed policymakers thought rates would be at the end of this year, when they last offered a forecast in March.
While inflation has cooled since last summer, it's still more than twice as high as the central bank's target of 2%.
Prices in March were up 4.2% from a year ago, according to the Fed's preferred inflation measure. The "core" inflation rate, which excludes volatile food and energy prices, was 4.6%.
Has the Fed done enough?
The Fed's efforts to curb inflation by slowing the economy with the most aggressive series of rate hikes since the 1980s are beginning to show results.
Construction and manufacturing — which are particularly sensitive to borrowing costs — have downshifted. And after a strong January, consumer spending slowed sharply in February and March.
The job market also appears to be losing some steam, although unemployment is still hovering near a 50-year low.
Job gains in March were the lowest in more than two years. And while layoffs are still rare by historical standards, they have been inching up.
Some observers warn that any additional rate hikes by the Fed would put more jobs at risk, without necessarily doing much to control prices.
"It becomes less and less warranted to continue pursuing policies that theoretically bring down inflation but at expense of the labor market," said Lindsay Owens, executive director of the Groundwork Collaborative, a progressive think tank in Washington, D.C. "It's not the case that we have to keep hammering away."
Banking turmoil complicates the Fed's job
Recent stress in the banking sector also factors in the Fed's calculation. Since the collapse of Silicon Valley Bank and Signature Bank in March, other lenders have grown more cautious about extending loans.
The resulting drop in lending weighs on economic growth, much like rising interest rates, but its effects are even harder to calibrate and predict.
The Fed itself bears some responsibility for the banking turmoil, which has yet to abate with the collapse of First Republic Bank over the weekend.
The Fed's aggressive rate hikes have reduced the value of some bank investments.
And a scathing report from the Fed last week found its own supervisors failed to properly monitor Silicon Valley Bank, allowing its problems to fester until it was too late.
Michael Barr, the Fed's vice chair for supervision, blames a policy choice in 2019 that exempted all but the biggest banks from strict scrutiny, as well as a shift in culture at the Fed to favor a lighter touch in bank regulation.
Powell endorsed Barr's findings and his call for stronger bank regulation.
"I've been chair of the board for five-plus years now. And I fully recognize that we made some mistakes," Powell said. "We're committed to learning the right lessons from this episode and will work to prevent events like these from happening again."
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Transcript
JUANA SUMMERS, HOST:
Interest rates are going higher, but this could be the last time you hear that for a while. The Federal Reserve voted to raise rates by another quarter percentage point today in its ongoing push to bring down inflation, but the central bank hinted that could be the last rate hike of this cycle. NPR's Scott Horsley is in studio with us now. Hey, Scott.
SCOTT HORSLEY, BYLINE: Hi, Juana.
SUMMERS: So Scott, what does this tell us about the Fed's battle against inflation? Where do things stand now?
HORSLEY: Well, the fight is not over. Inflation's still too high. It's more than twice the Fed's target rate of 2%, and the central bank thinks it's going to take a while to get back to a period of stable prices. But after 10 rate hikes now in the last 14 months, the Fed thinks it has borrowing costs about where they need to be in order to eventually bring prices under control. For a long time, the Fed was sort of playing catch-up, and it said repeatedly in its statements that rates would have to go even higher. That language was dropped from today's statement, and Fed Chairman Jerome Powell says they may be able to stand pat with rates where they are.
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JEROME POWELL: I think we've moved a long way fairly quickly, and I think we can afford to look at the data and make a careful assessment.
HORSLEY: This has already been the most aggressive series of rate hikes since the Paul Volcker era back in the 1980s. Of course, higher interest rates make it more expensive to borrow money for a business, get a car loan or just carry a balance on your credit card.
SUMMERS: So put this into some perspective for us. How have these higher rates affected the economy?
HORSLEY: Economic growth has definitely slowed down. You especially see that in sensitive industries like construction and manufacturing. Ordinary people are starting to spend less money as well, and even the overheated job market has cooled off a bit. That said, Powell believes there is still a chance to avoid tipping into a recession even though rate hikes like this ordinarily end with an economic downturn.
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POWELL: I continue to think that it's possible that this time is really different, and the reason is there's just so much excess demand, really, in the labor market. We've raised rates by five percentage points, and the unemployment rate is 3.5%.
HORSLEY: And we'll get a closer look at how the job market is faring on Friday. That's when the Labor Department is set to report on employment and unemployment for the month of April.
SUMMERS: Switching gears a bit - a third, big bank failed over the weekend with the collapse of First Republic. How did that affect the Fed's decision?
HORSLEY: Yeah. The Fed is definitely watching these bank failures. Other banks are expected to get stingier with credit as a result of these collapses, and that acts like another drag on the economy. The Fed has also accepted some responsibility for the collapse of Silicon Valley Bank back in March, which sparked these jitters throughout the banking sector. The Fed itself was Silicon Valley Bank's main overseer, and Powell took responsibility for lapses in bank supervision.
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POWELL: I've been chair of the board for five-plus years now, and I fully recognize that we made mistakes. I think we've learned some new things as well, and we need to do better.
HORSLEY: Last week, the Fed issued a scathing report on its own missteps at Silicon Valley. Supervisors there were slow to identify problems at the bank, and even when the problems were spotted, the supervisors didn't act aggressively enough to ensure those problems were fixed. The Fed has promised more aggressive bank oversight going forward, and Powell said today he's confident they'll be able to put stronger rules in place.
SUMMERS: NPR's Scott Horsley, thanks as always.
HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.
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