Fed hikes interest rate a quarter of a point, raising the key federal funds rate, which was 0 percent in March 2020.
By Casey Harper
(The Center Square) – The U.S. Federal Reserve Board Wednesday announced another increase to the federal funds rate, inching the target range up to 5% to 5.25%, an increase of a quarter of a point.
Wednesday’s announcement is the tenth rate hike since March 2022.
“We are prepared to do more if greater monetary policy restraint is warranted,” Federal Reserve Chair Jerome Powell said in a news conference after the announcement.
The Fed bases its decision largely on the health of the economy and whether the agency thinks it can withstand the economic pain of another rate hike.
“Economic activity expanded at a modest pace in the first quarter,” the group said. “Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated.”
The Feds’ key interest rate was 1% to 1.25% just before the COVID-19 pandemic. In the middle of March 2020, the rate dropped to 0 to 0.25%. The federal government soon kicked off a several trillion dollar spending spree over the next two years in response to hardships during the pandemic, which were fueled in large part by aggressive lockdown policies.
Since that pandemic-era spending, inflation has soared, in particular affecting gas and food prices.
The banking sector has struggled in recent months with several bank collapses fueled in part by rate hikes. Experts fear another rate hike could worsen that situation, which is far from stabilized. The rate hike could increase fears that regional banks will go insolvent because they are less able to weather storms than bigger banks, potentially leading to a run on the depositors hoping to get their money out just in case.
The Federal Reserve board waved off those risks in its announcement.
“The U.S. banking system is sound and resilient,” the group said. “Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.”
Democrats raised concerns that the rate hikes amid a shaky banking environment could force an economic downturn that hurts Democrats in the next election.
“The Fed’s extreme interest rate hikes risk triggering a recession, destroying jobs and crushing small businesses,” U.S. Sen. Elizabeth Warren, D-Mass., wrote on Twitter.
Some were more optimistic.
“The remaining question is how much the regional bank crisis and credit crunch will slow the economy,” said Gina Bolvin, president of Bolvin Wealth Management Group. “Investors should remain cautiously optimistic. Evidently Powell thinks the economy is strong enough to continue to tighten.”
Originally published by The Center Square. Republished with permission.
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