The Fed warned that the financial upheaval stemming from the collapse of two major banks is “likely to result in tighter credit conditions” and “weigh on economic activity, hiring and inflation.”
The Federal Reserve will have to decide whether to extend its year-long streak of rate hikes despite the jitters roiling the financial industry.
Even though prices are rising much faster than the Fed wants, some economists expect the central bank to suspend its year-long streak of interest rate hikes when it meets next week.
The worry is the collapse of SVB and Signature Bank are just the start of a longer list of casualties from the Fed’s shift to the highest rates since policymakers began slashing borrowing costs in 2007.
Jerome Powell’s more nuanced remarks Wednesday appeared to be an effort to quell any assumption that the Fed has already decided to raise rates more aggressively based on a recent string of data that pointed to strong economic growth and still-high inflation.
Jerome Powell’s comments reflect a sharp change in the economic outlook since the Fed’s most recent policy meeting in early February.
Most economists and Wall Street investors had expected the Fed to carry out another quarter-point increase when it next meets March 21-22. But in recent days, traders have been pricing in a greater likelihood of a half-point increase.
U.S. central bankers are waging their most aggressive action against high inflation in a generation.
January’s price data exceeded forecasters’ expectations, confounding hopes that inflation was steadily decelerating and that the Fed could relent on its campaign of rate hikes.
The U.S. economy showed remarkable resilience at the start of the year, highlighting robust demand that’s keeping inflation elevated and heaping pressure on the Federal Reserve to stomp the brakes even harder.
Jerome Powell’s remarks followed the government’s blockbuster report last week that employers added 517,000 jobs in January, nearly double December’s gain. The unemployment rate fell to its lowest level in 53 years, 3.4%.
January’s job growth far exceeded December’s 260,000 total and extended a streak of powerful hiring gains that raised concerns at the Federal Reserve about inflation pressures.
The Fed’s latest move, though smaller than its previous hike—and even larger rate increases before that—will likely further raise the costs of many consumer and business loans and the risk of a recession.
With signs of weaker economic growth along with steadily lower inflation readings, reduced consumer spending and even some signs of a slowdown in the job market, the Federal Reserve is now navigating a more treacherous terrain.
Loretta Mester, a key Federal Reserve policymaker, said further rate hikes are still needed to decisively crush the worst inflation bout in four decades.
The U.S. inflation report for December being released Thursday morning could provide another welcome sign that the worst bout of spiking prices in four decades is slowly weakening.
Overall, the minutes showed that Federal Reserve officials remained determined to keep rates high to quell inflation and have taken little comfort from inflation’s decline from a peak of 9.1% in June to 7.1% in November.
Consistent with a sharp slowdown, Fed officials projected that the economy will barely grow next year, expanding just 0.5%, less than half the forecast it had made in September.
The six rate hikes the Fed has already imposed this year have raised its key short-term rate to a range of 3.75% to 4%, its highest level in 15 years.
In a recent speech, Federal Reserve Chair Jerome Powell pointed to the shortfall of workers and the resulting rise in average pay as the primary remaining driver of the price spikes that continue to grip the economy.
