The Federal Reserve raised its key interest rate by a quarter-point Wednesday to the highest level in 16 years in an effort to slow inflation. It signaled that it might pause after ordering 10 consecutive rate hikes, which have made borrowing increasingly expensive for families and businesses.
After its latest policy meeting, the Fed removed a sentence from its previous statement that had said “some additional” rate hikes might be needed, Associated Press reported. It replaced it with language that said it will now weigh a range of factors in “determining the extent” to which future hikes might be needed.
Mortgage rates have more than doubled since the Fed started raising interest rates in March 2022 and rates have risen for auto loans, credit card borrowing and business loans, raising the risk of a recession. Home sales are down as a result.
The benchmark rate is now about 5.1 percent.
In the wake of the banking crisis and three failed regional banks, a growing chorus of economists and stakeholders predict a recession. However, Fed Chairman Jerome Powell suggested that the central bank can slow price growth without crashing the economy and the Fed’s work might be almost done.
“I continue to think that it’s possible that this time really is different,” Powell told reporters Wednesday. “Avoiding a recession is, in my view, more likely than having a recession.”
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Historically, the economy usually grows until interest rates are hiked to cool down price inflation and the soaring cost of living. Interest rates usually fall during a recession.
Jeffrey “Bond Market King” Gundlach, the billionaire CEO of investment firm DoubleLine Capital, said there’s an increased likelihood of a recession and the Fed probably won’t lift interest rates again after the latest increase, Bloomberg reported.
He cited cumulative rate increases by the Fed since March 2022 and credit contraction for “turning more bearish at this point in time.”
“Recessionary odds are pretty darn high right now,” Gundlach said during the CNBC interview on Wednesday.
Powell said the Fed will monitor the recent bank failures to see if it’s time to slow the rate hikes, but he expressed confidence in the system.
“Conditions have broadly improved and the U.S. banking system is sound and resilient,” Powell said.
If the U.S. government is accused of being in denial about the economy, it won’t be the first time. When inflation started soaring in 2021, some Democrats engaged in denial, using terms such as “highly unlikely”, “transitory”, and “temporary” to describe the chances that this was inflation.
Early in Joe Biden’s presidency, he pointed to lower unemployment as a sign of a rebounding economy amid the pandemic, even as leading polls sounded the alarm that inflation would be a problem for him.
Powell repeatedly downplayed the risk of inflation earlier in 2021 before finally admitting in December 2021 that he was retiring the word “transitory” to describe the inflationary outlook.
Powell acknowledged on Wednesday after the 10th consecutive rate hike that the Fed’s commitment to combat persistent inflation could push the U.S. into a recession.
“It’s possible that we will have what I hope would be a mild recession,” Powell said.
The Fed in December projected growth of 0.5 percent in 2023, AP reported. Goldman Sachs estimates that a widespread pullback in bank lending could cut U.S. growth by 0.4 percentage points in 2023 — possibly enough to cause a recession.
Joel Griffith from the conservative think tank Heritage Foundation accuses the Fed of playing a key role in creating today’s inflation in the first place.
“The Federal Reserve has been an abject failure, particularly over the last few years,” Griffith told Christian Broadcating Network (CBN News). “What we need is for the Fed to actually be honest with the public, admit that they made a mistake in printing these trillions of dollars…”
Overall inflation has cooled in the U.S. thanks to falling gas, food and energy prices, but “core” inflation — which excludes volatile food and energy costs — has remained chronically high. Core prices rose 4.6 percent in March compared to a year ago.
Powell cited persistently low unemployment despite layoffs as one reason for his optimism. He also emphasized that the banking system is sound and that the Fed is working to ensure the bank crises won’t happen again. And he suggested that the way the economy has responded to rate hikes and tightening credit conditions may mean the federal funds rate has been raised for the last time this cycle.
“There’s a sense that we’re much closer to the end of this than to the beginning,” Powell said.
Images: Federal Reserve Chairman Jerome Powell at a news conference, March 3, 2020. (AP /Jacquelyn Martin) / Blue skies and sunshine photo by Jason Trbovich, https://www.flickr.com/photos/jasontrbovich/