Fed hikes rates amid banking turmoil
The world’s largest economy is bracing for recession after the US Federal Reserve raised interest rates for a tenth – but possibly final – time this afternoon.
“We, at the Fed, will do everything we can to achieve our price stability goals,” declared the bank’s chair Jay Powell today, as he pressed ahead with his mission to curb the beast of inflation by implementing another 25-basis point hike, lifting rates to a 16-year high of between 5% and 5.25%.
Powell did, however, raise hopes that this could be the final hike. When pressed by reporters on whether we can expect to see further tightening, he replied: “We are no longer saying that we anticipate it, we will be driven by the incoming data,” and “that is a meaningful change,” he acknowledged.
Today’s hike comes as price growth remains stubbornly above its long-term target of 2% in the US. Headline annual consumer inflation did fall to 5% in the March – 1 percentage point lower than in February and a significant slowdown since June’s peak of 9.1%.
However, core inflation – which strips out volatile food, fuel and energy prices and is viewed as a more accurate measure of underlying inflation trends – continues to concern economists, having edged up from 5.5% to 5.6% between February and March.
The Fed’s decision today will put pressure on other central banks to press ahead with their own hikes. Tomorrow, the European Central Bank is expected to raise its main rate for a seventh consecutive time to 3.75%, after demoralising figures published yesterday showed eurozone inflation ticked upwards in April for the first month since September, rising from 6.9% to 7%. Next week, the Bank of England is also expected to hike interest rates for the twelfth time in a row to 4.5%. Though it’s worth noting that Sterling rose to an 11-month high against the dollar following the Fed’s announcement today.
In all these countries, the full shock of monetary tightening has yet to hit – given the time it takes for successive interest rate rises to take effect, and fully unleash pain on the economy. In the US, higher interest rates are contributing to the weaker growth outlook, with CEBR predicting that the US economy will grow by just 0.6% in 2023 – its weakest growth performance since 2008.
The Fed’s aggressive pace of rate rises over the past year has also made lenders’ bond holdings less valuable.
Indeed, today’s hike comes amid further US banking turmoil following the collapse of First Republic Bank earlier this week.
Despite JP Morgan’s rescue acquisition of First Republic, shares in many other top regional lenders across the country remain under pressure as investors are still nervous. Although JP Morgan boss Jamie Dimon claimed the immediate banking crisis in the US was “over” after the rescue of First Republic, analysts say the mood is still fragile because of fears that the recent banking failures are the tip of an iceberg and that we are entering a new stage of a full-blown US banking crisis.
Further rate hikes will bring additional volatility to banking systems, hence why Powell is under pressure to signal that today will be the final hike, before he halts the country’s fastest rate of monetary policy tightening in 40 years.
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