The Fed Raises Rates Again – and Signals It May Be Ready to Pause

The Fed Raises Rates Again – and Signals It May Be Ready to Pause

Kevin Lamarque

The Federal Reserve on Wednesday raised its benchmark interest rate by 25 basis points and signaled that it may be ready to suspend its rate hike campaign in the future.

The widely expected move marks the 10th time the central bank has raised rates in a little over a year. Since March 2022, the Fed has raised its key rate by five percentage points, to a range between 5% to 5.25%, a 16-year high.

Although Federal Open Market Committee did not explicitly say that it will pause its campaign of interest rate increases, it did change the language used in its closely-watched post-meeting statement, removing a phrase saying that “the Committee anticipates that some additional policy firming may be appropriate.” Instead, Fed officials said they would continue to monitor the economic data to see if any further changes in its policy are necessary in the future as the central bank pursues its target inflation rate.

“In determining the extent to which additional policy firming may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments,” the FOMC said. According to The Wall Street Journal’s Nick Timiraos, the FOMC used similar language in 2006 when it signaled that was finished raising interest rates at that time.

Speaking to reporters, Fed Chair Jerome Powell called out the significance of the new language. “That’s a meaningful change that we’re no longer saying that we anticipate” further increases, he said. The Fed chief also emphasized that the bank’s next move will be determined by how the economy performs. “Looking ahead, we’ll take a data-dependent approach in determining the extent to which additional policy firming may be appropriate,” he added.

Economy looks healthy: The economy expanded at a “modest pace” in the first three months of the year, the FOMC said. Unemployment is still low, and the labor market is “robust.” The committee members also said that the banking sector is “sound and resilient.”

Powell said that while the labor market seems to be moving toward more normal conditions, with wage growth easing and the number of vacant positions falling, it still has a way to go. “[O]verall, labor demand still substantially exceeds the supply of available workers,” he said.

Still, the steady improvement in conditions from the Fed’s perspective suggests that a “soft landing” for the economy may still be an option. “There are no promises in this, but it just seems to me that it’s possible that we can continue to have a cooling in the labor market without the big increases in unemployment that have gone with many prior episodes,” Powell said.

Keeping options open on rates: KPMG Chief Economist Diane Swonk described the Fed’s stance as a “hawkish pause,” one that gives the central bank the leeway to continue to ratchet up rates if conditions call for it. JPMorgan’s Michael Feroli agreed, saying in a note that while the FOMC’s change in language hints at a pause in interest rate hikes, “the language also retained the option to tighten at the next meeting if conditions warrant.”

A message on the debt ceiling: Asked about the current showdown over the debt ceiling, Powell said that the Fed defers to Congress on fiscal matters. At the same time, he said it is important the debt limit be raised in a “timely way.” We “should not even be talking about a world in which the U.S. does not pay its bills,” he said. “It should not be a thing.”

Powell also warned that the Fed cannot prevent or undo any damage that may occur in the event that lawmakers are unable to raise the debt limit in time. “No one should assume that the Fed can … protect the economy and our financial system or reputation globally from the damage such an event may inflict,” he said.