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Federal Reserve signals streak of rate increases could end soon

Federal Reserve Board Chair Jerome Powell speaks during a news conference at the Federal Reserve, Wednesday, March 22, 2023, in Washington. (AP Photo/Alex Brandon)
Federal Reserve Board Chair Jerome Powell speaks during a news conference at the Federal Reserve, Wednesday, March 22, 2023, in Washington. (AP Photo/Alex Brandon)
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The Federal Reserve moved forward with an increase to its benchmark interest rate on Wednesday despite turmoil brought on by bank failures and signaled its streak of rate hikes could come to an end soon as the economy cools.

The 25-basis point increase came in at economists’ expectations, marking the ninth increase since the Fed started lifting the benchmark interest rate from zero a year ago.

In its Federal Open Markets Committee statement after its March meeting concluded, the Fed also said the banking system is “sound and resilient” in a nod to concerns about instability in financial markets after the collapses of Silicon Valley Bank and Signature Bank.

Prior to the bank collapses, Fed chairman Powell had indicated the Fed could get more aggressive at its March meeting after a blistering jobs report and other government data that showed inflation was lingering around 6%. In testimony in front of Congress, he indicated the central bank was prepared to go back to a 50-basis point increase.

That sentiment shifted shortly after with the downfall of Silicon Valley Bank and Signature Bank that prompted government intervention to avoid further bank runs and securing the public’s faith in the country’s banking system.

“It is perfectly logical for the FOMC to slow down pace of rate hikes given significant uncertainty around the potential real economy effects of the 2023 regional bank runs which could potentially have the effect of decreased confidence, slowed economic activity and accelerated disinflation,” said Jon Hartley, a research fellow at the Foundation for Research on Equal Opportunity.

The resulting turmoil in the financial system added to the uncertainty hanging over the U.S. economy as the Fed tries to steer it into a “soft landing,” where inflation cools without sending the economy into a recession.

Heading into the FOMC meeting this week, some economists and investors were hoping the Fed would pause its tightening cycle to continue examining financial conditions over the next few weeks while the aftermath of the bank collapses stabilizes, and more economic data is released.

Powell said officials considered pausing rate increases this month but said lingering inflation and other economic indicators pushed them to a smaller increase instead. He said future decisions will be driven by economic data and that it would be difficult to predict future trends with the volatility in the market.

Powell definitely wants to convey that there is uncertainty around the economic activity effects of the 2023 regional banking run,” Hartley said. “At the same time, he wants to make sure he reinforces the Fed's commitment to price stability as inflation remains well above the Fed's 2% target even though it is decelerating."

The recent volatility has reaffirmed some analysts’ belief that the U.S. will teeter into a recession at some point this year. Wells Fargo released an updated report on Tuesday that forecast the Fed’s tightening and scars from the banking turmoil will bring on a modest recession starting in the second half of the year.

Some economists have said that smaller and regional banks could lend less money as a result of the turmoil in the banking industry to preserve their liquidity. Less lending would make it more difficult for people and businesses to get money to finance things and could slow the economy.

Powell also said the Fed is expecting tighter credit conditions that will weigh on economic activity and that governors will be watching it as they move forward.

“It is too soon to determine the extent of these effects and therefore too soon to tell it how monetary policy should respond. As a result, we no longer state that we anticipate that ongoing rate increases will be appropriate to quell inflation,” Powell said.

In addition to guaranteeing all deposits from both the failed banks, even those that are greater than the federally insured limit of $250,000, the Fed has set up a loan program with generous terms for banks that could find themselves in a liquidity pinch. But concerns about volatility and broader economic conditions could still result in fewer loans.

Cooling the economy through less lending is the primary function of the Fed’s interest rate increases, which make it more expensive for consumers to borrow money for things like auto loans. Coupled with the potential for less lending from banks, a slowdown in the economy could help the Fed meet its goal of bringing inflation back down to its target of 2% year-over-year.

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Powell warned that the process of getting inflation back to 2% still “has a long way to go and is likely to be bumpy.”

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