Fed Raises Interest Rate Again, Hints at Potential Pause

Facts

• The US Federal Reserve (Fed) is staying true to its strategy in the fight against inflation as it raised its key interest rate by a quarter of a percentage point on Wednesday. The now roughly 5.1% rate is the central bank’s 10th consecutive hike and a 16-year high.¹
• However, unlike recent rate hikes, the Fed did not say that more hikes are likely in its statement announcing its decision. Fed Chair Jerome Powell called the bank’s language a “meaningful change,” implying that a pause on rate hikes could happen.²
• The bank added that the language change was similar to that of 2006 when the Fed stopped raising interest rates. This does not necessarily mean that rates will stay the same after the Fed's policy meeting in June, with Powell suggesting decisions will be made on a "meeting-by-meeting" basis.³
• The central bank’s statement added that there have been “robust” job gains recently and that unemployment has remained low. However, inflation still remains high, as high interest rates and slowing growth signal a potential recession.⁴
• Over the past 14 months, the Fed has provided clear messaging that fighting inflation is its top priority, but recent failures of three large US banks have added a wrinkle to the central bank’s strategy. Many believe that rising interest rates have contributed to banking collapses.⁵
• Despite fears surrounding the US banking industry and overall economy, the Federal Open Market Committee (FOMC) called the US banking system “sound and resilient.” Additionally, a drop in job openings signaled a cooling labor market, making a rate pause more likely.⁶

Sources: ¹Associated Press, ²New York Post, ³Reuters, ⁴NBC, ⁵PBS NewsHour, and ⁶The Hill.

Narratives

• Narrative A, as provided by CNBC. The Federal Reserve has been abundantly clear that it will continue to pursue a tight monetary policy until inflation is under control, but this latest rate hike could bring even greater damage beyond stubborn inflation. While the Fed has not achieved its goal of curtailing prices, it must stop going down the track of endless rate hikes that hurt consumers and could drive unemployment to scary levels. Fighting inflation is important, but it's not the Fed’s only job.
• Narrative B, as provided by Washington Examiner. The Fed is stuck between a rock and a hard place as it has persistent inflation on its left and banking collapses on its right. We have known for months that this recent rate hike was a certainty and that the Fed would stay true to its core goal of containing inflation. While it remains above its target, inflation has gone down in recent months. This a sticky situation, but today's rate hike was a reasonable call.