The economy appears to be cooling, with consumer spending flat in February and March, indicating that many shoppers have grown cautious in the face of higher prices and borrowing costs. The Fed’s decision Wednesday came against an increasingly cloudy backdrop. Congressional Republicans are demanding steep spending cuts as the price of agreeing to lift the nation’s borrowing cap. The Fed is now also grappling with the threat of a prolonged standoff around the nation’s borrowing limit, which caps how much debt the government can issue. Chair Jerome Powell had said in March that a cutback in lending by banks, to shore up their finances, could act as the equivalent of a quarter-point rate hike in slowing the economy.įed economists have estimated that tighter credit resulting from the bank failures will contribute to a “mild recession” later this year, thereby raising the pressure on the central bank to suspend its rate hikes. The banking upheaval might have played a role in the Fed’s decision Wednesday to consider a pause. All three failed banks had bought long-term bonds that paid low rates and then rapidly lost value as the Fed sent rates higher. The surge in rates has contributed to the collapse of three large banks and turmoil in the banking industry. “Job gains have been robust in recent months, and the unemployment rate has remained low,” the statement said. Inflation has fallen from a peak of 9.1% in June to 5% in March but remains well above the Fed's 2% target rate.
Still, the Fed's statement offered little indication that its string of rate hikes have made significant progress toward its goal of cooling the economy, the job market and inflation. The Fed’s latest move, which raised its benchmark rate to roughly 5.1%, could further increase borrowing costs. The Fed's rate increases over the past 14 months have more than doubled mortgage rates, elevated the costs of auto loans, credit card borrowing and business loans and heightened the risk of a recession. It replaced it with language that said it will consider a range of factors in “determining the extent” to which future hikes might be needed. In a statement after its latest policy meeting, the Fed removed a previous sentence that had said “some additional" rate hikes might be needed. But the Fed also signaled that it may now pause the streak of 10 rate hikes that have made borrowing for consumers and businesses steadily more expensive. WASHINGTON - The Federal Reserve reinforced its fight against high inflation Wednesday by raising its key interest rate by a quarter-point to the highest level in 16 years.
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