Despite new 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 another 0.25 percent hike on Wednesday, bringing the target range for the federal funds rate to 5.00 to 5.25 percent – the highest level since 2007.
Once again, 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 now could have send the wrong message: one of alarm. Instead, the Fed attempted to convey confidence, saying that conditions in the sector “have broadly improved since early March” and that the U.S. banking system is “sound and resilient”.
There was a slight but notable change in tone, however, signaling that an end to this tightening cycle may be in sight. While the previous FOMC statement, issued in March, said that the committee was anticipating “that some additional policy firming may be appropriate,” there was no explicit hint at further rate hikes in this week’s statement. If the Fed were to refrain from any further rate hikes this year, that would be in line with projections released after the FOMC’s March meeting, which showed a majority of committee members anticipating the target range for the federal funds rate to remain at the current level until the end of 2023.
The Fed also acknowledged that the banking crisis may actually help to bring down inflation, as the situation has contributed to “tighter credit conditions for households and businesses,” which are “likely to weigh on economic activity, hiring, and inflation.”
This chart shows the U.S. federal funds target rate since 2007.
