The Federal Reserve announced another interest rate hike on Wednesday, plowing ahead with its efforts to fight inflation even against the backdrop of a possible recession.
Following a two-day meeting of its monetary policy committee in Washington, D.C., the central bank announced it would raise its interest rate target by a quarter of a percentage point. The move comes after the Fed conducted another March hike of the same magnitude and a barrage of increases of 0.50 points and 0.75 points before that.
HOW FAR INFLATION HAS FALLEN SINCE ITS PEAK – AND HOW MUCH FURTHER IT HAS TO GO
The central bank’s key overnight rate is now 5% to 5.25%. Rates are now the highest they have been since 2007, at the outset of the global financial crisis.
The move, while expected, is a controversial one due not only to the growing odds of a recession, but also given volatility in the financial sector following Silicon Valley Bank’s failure about two months ago. The rate hike is a clear signal that the central bank continues to see inflation as a bigger threat to the economy than an economic slowdown or the turmoil in the banking system.
Investors expect Wednesday’s rate revision to be the last before the Fed pauses tightening, according to futures contract prices for rates in the short-term market targeted by the Fed. Investors predict that the Fed will begin lowering its target rate by as much as a full percentage point by the end of the year.
Inflation has been in decline over the past several months and the red-hot labor market has begun to weaken, something that Fed officials have been hoping to see as a sign that price pressures are abating.
Last Friday, the Bureau of Economic Analysis released the March numbers for the Fed’s preferred inflation gauge, the personal consumption expenditures index, which showed inflation on an annual basis slowing from 5.1% in February to 4.2% in March. About a year ago, PCE inflation was running at nearly 7%.
Still, inflation is high above the Fed's 2% target. And "core" inflation, which strips out the volatile categories of food and energy, has show fewer signs of declining.
Recent signs of labor market activity slowing, though, should provide reassurance to the Fed that price pressures are weakening.
The number of job openings in the U.S. dropped below 9.6 million in March, the lowest level in about two years, according to Bureau of Labor Statistics. Some 236,000 jobs were added that month, marking the weakest monthly increase since December 2020.
The signs of slowing inflation coupled with a softening labor market has caused some economists and politicians to urge the Fed against further tightening. Ahead of Wednesday’s Fed decision, a group of lawmakers — including Sen. Elizabeth Warren (D-MA), Rep. Jerry Nadler (D-NY), and Sen. Bernie Sanders (I-VT) — called upon the Fed to stop hiking.
In a letter to Fed Chairman Jerome Powell, the lawmakers said that they “strongly urge you to respect the Fed’s dual mandate, pause your rate hikes, and avoid engineering a recession that destroys jobs and crushes small businesses.”
Recession odds increase as rates rise. The Conference Board’s Leading Economic Index suggests a recession will hit sometime in the middle of the year, while the New York Fed’s probability modeling indicates a nearly 58% chance of recession in the next 12 months.
Fed staff themselves predicted a mild recession in a presentation to central bank officials at the Federal Open Market Committee’s March meeting, minutes from the meeting recently revealed.
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Updated economic projections are announced by the Fed every other FOMC meeting, with the last projections released in March.
The median Fed official at the time predicted inflation, as gauged by the PCE index, will be at 3.3% by the end of the year, compared to a December projection of 3.1%. The Fed also increased its forecast for the unemployment rate. It now predicts the unemployment rate will tick up to 4.5% by the end of this year, versus 3.5% today.