At a news conference Wednesday, Fed Chairman Jerome H. Powell said the central bank considered pausing its rate-hike plan in light of the banking system issues in recent weeks but ultimately decided a quarter-point increase would be most appropriate.
While the U.S. banking system "is sound and resilient," the committee said in a statement that the developments "are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring and inflation."
Mr. Powell said "such a tightening in financial conditions would work in the same direction as rate tightening," which is why the committee did not raise rates higher this week.
Although inflation has cooled in recent months, it remains stubbornly high. The consumer price index rose 6% in February from a year earlier, down from 6.4% year-over-year in January, according to data from the Bureau of Labor Statistics released March 14. The annualized CPI figure has dropped steadily since June, when it was at 9.1%, a 40-year high.
"Inflation has moderated somewhat since the middle of last year, but the strength of these recent readings indicates that inflation pressures continue to run high," Mr. Powell said. "The process of getting inflation back down to 2% has a long way to go and is likely to be bumpy."
Also of note, the unemployment rate rose slightly in February to 3.6%, up from 3.4% in January, but it still remains historically low. On Wednesday, Mr. Powell repeated his characterization of the labor market as "tight."
The committee's 11 members unanimously approved the latest rate hike and said in a statement that 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." The committee removed a line from its February statement that said, "Ongoing increases in the target range will be appropriate."
Looking ahead, the committee's 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 is now at 4.3%, up slightly from 4.1% in December.
Separately, the committee's median projection for personal consumption expenditures inflation by the end of 2023 is now 3.3%, up from 3.1% in December. The committee sees PCE inflation decreasing to 2.5% by the end of 2024 and 2.1% by the end of 2025.
The 12-month change in total PCE prices slowed to 5.4% in January from its peak of 7% in June.
With its latest rate hike, the Fed is "trying to convey their consternation with inflation but also their uncertainty around the impact of recent events on financial conditions," said Robert Dishner, senior portfolio manager of multisector fixed income at Neuberger Berman Group, in a statement. "This doesn't sound like a Fed that is going to be cutting rates by this summer, but this hiking cycle may very well be done now or perhaps one more in May."
The committee's next meeting is May 2-3.