By increasing its benchmark interest rate by a quarter percent on Wednesday, the Federal Reserve strengthened its campaign against excessive inflation.
However, the Fed hinted that it might now halt its 10-hike rate streak, which has steadily increased the cost of borrowing for consumers and businesses.
The Fed stated that while the banking system is “sound and resilient,” the turmoil in the financial sector might limit borrowing, spending, and growth in a statement following its most recent policy meeting.
It emphasized once more that the outcome of the cutback in bank lending “remains uncertain.”
Since the Fed began raising interest rates over the past 14 months, mortgage rates have more than doubled, as have the costs of auto loans, credit card debt, and business loans.
The risk of a recession has also increased. As a result, home sales have plummeted. With its most recent action, the Fed raised its benchmark rate to roughly 5.1%, potentially driving up borrowing costs further.
However, the Fed’s efforts to contain the worst inflation wave in four decades have only partially been successful, and the rise in rates has been a major factor in the failure of three sizable banks and the turmoil in the banking sector.
All three bankrupt banks purchased long-term bonds with low-interest rates that quickly lost value as the Fed raised interest rates.
The current state of the banking industry may have influenced the Fed’s decision to explore a pause on Wednesday.
Chair Jerome Powell had stated in March that a reduction in bank lending to support their solvency might have the same economic slowing effect as a quarter-point rate hike.
According to Fed economists, tighter lending brought on by bank failures may cause a “mild recession” later this year, increasing the pressure on the central bank to stop raising interest rates.
Currently, the nation’s borrowing limit, which limits the amount of debt the government can issue, is a concern for the Fed. In exchange for lifting the nation’s borrowing limit, congressional Republicans seek significant expenditure cuts.
The background for the Fed’s decision on Wednesday was getting progressively gloomier. Consumer expenditure remained unchanged in February and March, reflecting a slowing economy and a general increase in consumer skepticism in response to rising costs of goods and borrowing. Additionally, manufacturing is slipping.
Even the robust job market, which has maintained the unemployment rate close to 50-year lows for months, is exhibiting signs of weakness.
Fewer people are departing their employment for new opportunities, hiring has slowed down, and job advertisements have decreased.
The burden on the economy has increased due to the turbulence in the country’s banking industry, which exploded once more this weekend after regulators seized and auctioned out First Republic Bank.
It was the third significant banking collapse in the previous six weeks and the second-largest failure in U.S. bank history. Investors are now concerned that other regional banks might experience the same issues.
According to Goldman Sachs, a general decline in bank lending might reduce U.S. growth this year by 0.4 percentage points. That might be sufficient to trigger a recession. The Fed predicted growth of just 0.5% in 2023 in December.
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