Federal Reserve officials on Wednesday approved a third consecutive quarter-point interest rate hike as the central bank navigates elevated inflation and turmoil in the banking system.
The Federal Open Market Committee raised the federal funds rate to a range of 5% to 5.25% following its two-day meeting that concluded Wednesday. The quarter-point increase marks the committee's 10th straight rate hike dating back to March 2022.
The committee's 11 members unanimously approved the latest rate hike and said in a statement that it "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" when weighing additional policy firming. Notably, it removed a language from its March statement that said it "anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time."
When asked at a news conference Wednesday if the new language in the committee's statement indicates it will pause interest rate hikes, Fed Chairman Jerome H. Powell said that while it's a meaningful change, "We'll be driven by incoming data, meeting by meeting, and we'll approach that question at the June meeting."
Traders as of Wednesday afternoon were expecting the Fed to pause rate hikes starting at its meeting in June, according to the CME FedWatch Tool that tracks trading in the 30-day fed funds futures.
Whitney Watson, global co-head and co-CIO of fixed income and liquidity solutions at Goldman Sachs Asset Management, said in a statement that although inflation is trending in the right direction, progress has been bumpy. "A pause in rate actions is therefore appropriate, but further tightening is plausible should inflation prove sticky."
Ms. Watson added, "From a tactical perspective, we think market-implied pricing for policy easing later this year has room to unwind further. Structurally, we think higher yields and a world of greater uncertainty create a strong case for investors to restore allocations to high-quality core bonds."
Although inflation has cooled in recent months, it remains stubbornly high. The consumer price index was up 5% in March from a year earlier, down from 6% year-over-year in February, according to data from the Bureau of Labor Statistics released April 12. The annualized CPI figure has dropped steadily since June, when it was at 9.1%, a 40-year high.
Though it did not release updated projections Wednesday, at the committee's last meeting in March, its median projection for the federal funds rate at the end of 2023 remained at 5.1%, the same projection as in December. By the end of 2024, the committee's median projection moved to 4.3%, up slightly from 4.1% in December.
Moreover, it's median projection in March for personal consumption expenditures inflation by the end of 2023 was 3.3%, up from 3.1% in December. The 12-month change in total PCE prices slowed to 4.2% in March from its peak of 7% in June.
Since the collapse of Silicon Valley Bank in March — which the Fed said in an April 28 report was due to a "textbook case of mismanagement," coupled with central bank supervisors failing to take forceful enough action — the nation's banking system has faced headwinds. On Monday, J.P. Morgan Chase & Co. announced its purchase of beleaguered First Republic Bank, whose recent free fall included an injection of $30 billion from 11 U.S. banks that delayed its collapse.
"Conditions in baking sector have broadly improved since early March, and the U.S. banking system is sound and resilient," Mr. Powell said Wednesday. "We're committed to learning the right lessons from this episode and will work to prevent events like these from happening again," he said.
The Fed's next meeting is June 13-14.
