US Federal Reserve Imposes 10th Consecutive Rate Hike, Monitors Inflation

On Wednesday, the Federal Reserve raised interest rates by a quarter of a percentage point and hinted that it could temporarily suspend further rises.

This measure will allow policymakers to assess the effects of recent bank failures, watch for a political compromise on the US debt limit, and keep an eye on inflation.

The Fed's benchmark overnight interest rate was unanimously raised to the 5.00%-5.25% range, the 10th consecutive rise since March 2022.

However, the language indicating that additional policy firming may be required to achieve a monetary policy position that is restrictive enough to eventually bring inflation back to 2% is no longer present in the Fed's policy statement, according to Reuters.

Instead, the Fed added a more cautious statement, similar to the one it used in 2006 when it halted raising rates, stating that policymakers would assess the economy, inflation, and financial markets in the following weeks and months to decide if additional policy-firming was required.

Tough Decision for The Fed

Before the rate rise on Wednesday, the Federal Reserve was confronted with two economic trends that ran counter to one another and presented a risk to future rate decisions.

On one hand, the banking industry's unpredictability and the political unrest around the government's borrowing cap may hurt the economy since banks may restrict lending, and financial markets may get uneasy due to worries about the country's debt default. According to The LA Times, such concern would argue against additional rate increases, at least temporarily.

Conversely, inflation, although decreasing, continues to be higher than the central bank's 2% goal rate, which fuels concerns that the Fed may need to restrict credit even more to restrain price rises, which would result in more rate increases. Even higher borrowing costs and a greater chance of a recession would follow this trend.

Experts Weigh In

Austan Goolsbee, President of the Federal Reserve Bank of Chicago, stated last month that caution was required and additional information should be gathered before rates are too aggressive.

Goolsbee cited the banking crisis and the likelihood that many banks would limit credit for consumers and businesses as reasons to possibly avert a rate hike this week.

Similar warnings were issued by Patrick Harker, president of the Philadelphia Federal Reserve, about the risk of overheating the economy via rate increases.

Other regional Fed bank presidents, such as James Bullard of the St. Louis Fed and Neel Kashkari of the Minneapolis Fed, have said they would prefer the central bank to hold firm and raise its key rate to at least 5.4%, which would necessitate additional rate hikes following this week, per AP News.