A quarter percentage point increase in interest rates was approved by the Federal Reserve last Wednesday, bringing the benchmark federal funds rate to a range between 5% and 5.25%. With this decision, the Federal Open Market Committee delivered its tenth consecutive rate increase aimed at battling inflation, bringing the new benchmark federal-funds rate to a 16-year high, the fastest rate increase cycle in 40 years. In a new statement issued Wednesday, officials stated they would monitor economic and financial market developments as well as the effects of their earlier rate increases to assess whether additional policy firming may be necessary over time to return inflation to the 2% target. In the past few months, officials have been looking for clear signs of an economic slowdown to warrant ending rate hikes. Despite some signs of cooling, such as muted consumer spending and factory activity, steady hiring and brisk wage gains could sustain an elevated level of inflation. As a result of this, the Fed may change their strategy, and may need to see stronger signs of economic growth, employment, and inflation before continuing to raise rates.
Many economists and Fed officials urged greater caution in raising interest rates ahead of Wednesday’s meeting due to the lingering effects of banking stress and previous Fed rate increases. The belief was that this could expose additional banking vulnerabilities similar to the recent rescue of First Republic Bank by JPMorgan Chase. Others believed that the Fed would conclude increasing interest rates early if economic activity and inflation remain high, possibly creating a dilemma for the central banks between managing inflation and maintaining financial stability.