(CTN News) – As a banking crisis rattled the economy, the US Federal Reserve raised interest rates on Wednesday to their highest level in 16 years.
Since March 2022, when interest rates were zero and the Federal Reserve began its rapid inflation-fighting campaign, the Fed has raised its benchmark interest rate 10 times since then. Interest rates are now between 5% and 5.25%.
Following the Covid-19 pandemic, Jerome Powell, the Fed chair, has consistently urged the central bank to address inflation.
According to the Federal Reserve, the banking system is “sound and resilient.”
Inflation, employment, and economic activity are likely to be affected by tighter credit conditions. It is uncertain to what extent these effects will occur. “Inflation risks are being paid very high attention,” said the Federal Reserve.
Federal Reserve fast rate increases could end soon, according to the statement. In its last rate hike announcement, the statement included a phrase suggesting additional increases might be appropriate.
“I think we’re much closer to the end of this than the beginning,” Powell told a press conference, adding that “future policy actions will depend on how things unfold.”.
Government borrowing limits are currently in dispute, and Powell said an agreement was “essential.” He says a failure to pay our bills on time could have long-term effects on the economy.
Its lowest rate since 2021, the annual inflation rate was 5% in March, down from 9.1% in June. While inflation has steadily declined over the last few months, it remains well above the Federal Reserve 2% target.
Inflation has cooled over the last few months, but most of it has been in the volatile energy sector where prices spiked after Russia invaded Ukraine a year ago.
Housing prices rose 8.2% over the last year, excluding more volatile energy and food prices, which caused core inflation to increase slightly in March. Those issues, along with signs that the job market remains strong, have likely been on the minds of Fed officials. During March, 236,000 jobs were created.
The economy has started to cool, however. After years of growth following the pandemic, consumer spending has flattened and US manufacturing hit a nearly three-year low in March.
Following four three-quarter-point hikes in a row in the summer and fall as interest rates hit 40-year highs, the Fed is raising rates again by a quarter point.
However, some had expected the Fed to pause its series of hikes after the collapse of Silicon Valley Bank (SVB) in March. Despite expecting to increase rates by a half-point, the Fed raised rates by a quarter point, acknowledging that the banking crisis would also negatively affect the economy.
After worried depositors withdrew $100 billion this week, First Republic became the latest mid-sized US bank to collapse.
Even so, various Fed staff have publicly suggested in recent weeks that at least one more rate increase is likely, if not more.
The Fed will continue to closely monitor economic data for signs of slowing in the future, so it is unclear whether it will pause or pivot.