The US Federal Reserve last night hiked interest rates for the tenth time in a row in what may be the world’s most influential central bank’s final increase.
Chair Jerome Powell and the rest of the federal open market committee (FOMC), the group tasked with setting interest rates in the globe’s biggest economy, sent borrowing costs up 25 basis points to a range of five and 5.25 per cent.
The move was widely expected by markets, but speculation had grown recently over the Fed pausing its rate hike cycle at this meeting or the next to avoid igniting further banking failures by piling more pressure on the US financial system.
The Fed seemed to justify those bets, opening the door to pausing interest rate rises at its next meeting by dropping wording in an older FOMC statement that signalled it anticipated more monetary policy tightening would be needed to tackle inflation.
“In determining the extent to which additional policy firming may be appropriate to return inflation to two 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,” today’s statement read, a more dovish tone than its previous meeting statement.
Powell at a press conference after the rate announcement described the language shift as a “meaningful change”.
“The Fed’s new policy statement provides the clearest hint yet that the 25 basis point rate hike today is likely to be the last,” Andrew Hunter, deputy chief US economist at consultancy Capital Economics, said.
Collectively Powell and co have raised US borrowing costs 500 basis points in a little over a year, the quickest and steepest increase in rates since former Fed Chair Paul Volcker led the charge against inflation in the 1980s.
Powell said today’s increase was in response to price pressures continuing “to run high,” adding the inflation fight still has a “long way to go”.
US inflation has been on a downward trend since the summer, falling from a peak of just over nine per cent to five per cent.
The FOMC also moved to calm market fears about the strength of the US banking system, stressing it is “sound and resilient”.
Over the past two months or so, two of the biggest banking collapses in US history have taken place, with First Republic Bank snapped up by Wall Street titan JP Morgan earlier this week and Silicon Valley Bank failing in March.
US lenders have been rattled by Powell and co jacking up borrowing costs, prompting customers to yank cash out of potentially fragile firms.
First Republic had $100bn pulled from its vaults in the first three of this year, it revealed in results last week.
US banks have reined in lending, which will in essence produce a similar effect to the Fed tightening policy, easing pressure on Powell to keep pumping up rates.
“Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation,” the Fed added.
European lender Credit Suisse was also pawned off to its biggest rival UBS to prevent further deposit flights.
But the Fed looked through banking anxieties today to proritise taming inflation over shoring up financial stability.
However, FOMC officials are concerned core inflation – a more accurate measure of price pressures as it strips out volatile food and energy price movements – is still too stubbornly high.
Numbers out earlier this week revealed the Fed’s preferred inflation measure slipped to 4.6 per cent, a figure that is probably a bit too hot for US rate setters, luring them into today’s 25 point rise.
Markets, analysts and economists had before the announcement all rounded behind the idea that today’s rate rise could be Fed’s last.
The other big monetary authorities are also nearing the end of their hiking cycles.
Bank of England officials are tipped to raise rates 25 basis points next Thursday to 4.5 per cent. While markets think Governor Andrew Bailey and co could take them to a peak of five per cent, economists at Capital Economics and Pantheon Macroeconomics reckon next week’s rise will be the Bank’s final move.
A growing number of analysts, including those at Japanese bank Nomura, have also trimmed their European Central Bank (ECB) rate rise call to 25 basis points from 50 basis points tomorrow, though most think ECB President Christine Lagarde and co have a couple more increases in them.