The Fed raises rates and keeps its future options open.

 

Jeanna Smialek

https://www.nytimes.com/live/2023/05/03/business/fed-interest-rates

 

The Fed raises rates and keeps its future options open.

 

Federal Reserve officials raised interest rates by a quarter-point on Wednesday in the tenth straight move in their fight against rapid inflation — but they also opened the door to a possible pause in rate increases.

 

Central bankers lifted rates to a range of 5 percent to 5.25 percent, a level they have not reached since the summer of 2007. The move capped the fastest series of rate increases since the 1980s, as central bankers attempt to slow the economy and weigh down price increases.

 

But in their statement announcing the decision, policymakers also indicated that they will watch to see whether future rate moves are necessary. That marks a shift in stance: For months, they had assumed that additional changes would be needed.

 

The change opens the door to a possible pause in Fed interest rate increases, but it also leaves central bankers with options. Officials could raise rates by more if the economy and inflation prove hot.

 

“In determining the extent to which additional policy firming may be appropriate to return inflation to 2 percent over time, the committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments,” the policy-setting Federal Open Market Committee said in its release.

 

Fed officials are wrestling with conflicting economic challenges. Inflation remains well above their 2 percent goal, though it has begun to moderate, and the economy has shown signs of resilience in spite of their aggressive rate moves. At the same time, recent tumult in the banking sector could slow lending and increase the odds of a recession, and an impending debt limit showdown creates the risk of turmoil in markets.

 

Central bankers will need to figure out how much they expect the economy to slow in light of those developments — and what that means for policy. If consumer spending is poised to remain robust, it could allow companies to continue raising prices, and the Fed may need to do more to make sure that inflation comes back under control. But if the economy is barreling toward a serious recession in light of recent developments, the Fed might be better striking a more cautious stance.

 

Investors anticipated that the Fed would lift interest rates in May before hitting pause, and have even begun to pencil in a small chance that they could begin to cut borrowing costs as soon as June.

 

Jerome H. Powell, the Fed chair, will offer more details on the decision at a news conference at 2:30 p.m.

 

When the Fed raises interest rates, it makes it more expensive and often more difficult for families to take out loans to buy houses or cars or for businesses to raise money for expansions. That slows both consumer spending and hiring. As wage growth sags and unemployment rises, people become more cautious and the economy slows further.

 

That chain reaction can be painful. When Paul Volcker’s Fed raised interest rates to nearly 20 percent in the early 1980s, it helped to push joblessness above 10 percent.

 

Yet today’s Fed does not expect to raise interest rates nearly that high, and officials have been hoping that they can engineer a “soft landing”: A situation in which the economy slows enough to lower inflation back to normal, but not so much that lots of people lose their jobs.

 

Achieving that goal could be more complicated in light of recent bank troubles. Three big U.S. banks have failed — and required responses from the government — since early March, culminating in a government-enabled shotgun wedding between First Republic and JPMorgan Chase early Monday morning.

 

Many of the banks under stress in recent weeks have suffered because they did not adequately protect themselves against rising interest rates, which have reduced the market value of their older mortgages and securities holdings.

 

And there were already other signs surfacing that the Fed’s moves — which take time to have their full effect — are beginning to weigh on the economy. More expensive mortgages have translated into a meaningful slowdown in the housing market. Hiring is gradually slowing, and fewer jobs are going unfilled.

 

At the same time, inflation has been rapid for two years now and is showing staying power. Price increases are increasingly driven by service industries like travel and child care, rather than temporary supply shortages or oil price spikes. That could make today’s inflation difficult to fully stamp out.