MNI: Fed Raises Rates To Highest In 16 Years, More Possible

The Federal Reserve Wednesday raised interest rates by a quarter percentage point to its highest level since 2007, leaving the door open to more rate increases but suggesting officials have become less certain about how much more to tighten policy. 

"In determining the extent to which additional policy firming may be appropriate to return inflation to 2% over time, the committee will take into account the cumulative tightening of monetary policy, the lags which monetary policy affects economic activity and inflation, and economic and financial developments,” the Fed said in its May meeting statement. 

The increase brought the fed funds rate to a 5%-5.25% range that investors are hoping could be the peak for this cycle. 

Benchmark rates now match the peak outlined by the Fed at its March Summary of Economic Projections. Fed Chair Jerome Powell will face a range of questions in his upcoming press conference, including whether his views on rates have changed since then, and how he’s weighing rising financial stability risks with persistent inflation concerns.

TENSE BACKDROP

The central bank met this week as the banking sector faced fresh turmoil in the wake of JP Morgan's emergency acquisition of First Republic Bank over the weekend. Shares of other regional lenders have come under sharp pressure, raising fears of widening contagion. 

“Tighter credit conditions for households and businesses are likely to weight on economic activity, hiring and inflation,” the Fed said, adding that it remains “highly attentive” to inflation risks.

The Fed's actions come against the backdrop of an inflation that has been moderating but not quickly or smoothly enough for the FOMC's liking. The central bank's preferred measure of inflation, the PCE, slipped to 4.2% in March but core PCE remained at a stubbornly high 4.6% -- both more than double the official 2% target.

In addition, the labor market is still running too hot to give policymakers comfort that inflation will come back down to the Fed's goal.

There have been some signs of softening recently, with job openings falling in March to their lowest level since 2021. But monthly job growth still averaged nearly 350,000 per month in the first quarter, an impressive gain especially given how much the Fed has tightened monetary policy.