Banks were initially slow to raise their payouts as the Fed raised rates because they were awash in deposits. But those deposits have shrunk over the past year because inflation forced consumers and businesses to dip into their savings.
Christopher Waller, a member of the Federal Reserve’s governing board, said there has been little progress on inflation for more than a year.
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.
A significant driver of last month’s wholesale inflation slowdown was a huge drop in the prices of eggs, which plummeted 36.1% just in February. Egg prices had previously surged after a widespread outbreak of avian flu.
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.
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.
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.
Tuesday’s consumer price report from the government showed that inflationary pressures in the U.S. economy remain high and are likely to fuel price spikes well into this year.
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%.
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.
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.
Megadeals announced early in the year were soon replaced by jitters about getting mergers and acquisitions over the finish line, with monthly deal activity plummeting by almost half from May to June. The volumes have yet to recover.
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.
The report, the last of 2022, points to inflation that—while much too high—is beginning to ease.
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.
