Federal Reserve raises interest rates to 16-year high as fight to tame inflation persists

The Federal Reserve announced Wednesday it was raising its key federal funds rate to more than 5% — a 16-year high — as it continues its firefight against persistent inflation.

In a statement announcing the hike — the 10th-consecutive one since March 2022 — it omitted previous language that signaled more hikes are likely.

While inflation remained elevated, higher borrowing costs for households and businesses ‘are likely to weigh on economic activity, hiring, and inflation,’ the central bank said, adding that the extent of these effects ‘remains uncertain.’

It added that job gains had been ‘robust’ in recent months and noted that the unemployment rate remained low.

In an emailed statement following the announcement, Bankrate Chief Financial Analyst Greg McBride said this moment could prove a ‘last call’ for savers and anyone else looking to take advantage of attractive deposit-rate offerings from banks.

‘CD yields on maturities of one year and longer have peaked and now is the time to lock in,’ he said. ‘A slowing economy coupled with the Fed moving to the sidelines mean CD yields will start pulling back soon.”

The latest decision comes at a fraught moment as high prices, high interest rates and slowing growth would all seem to spell an economic downturn.

Indeed, many consumers would agree that between inflation and tighter credit conditions — and with no more pandemic financial assistance in sight — this is the worst they’ve felt about their finances since the pandemic broke out and upended everything.

Federal Reserve Chair Jerome Powell testifies before the Senate Banking Committee on March 7.Win McNamee / Getty Images

Yet, as the Federal Reserve readied to make its latest interest rate announcement, financial commentators continued to disagree about how it should be responding to economic conditions.

According to data from the CME Group, Wall Street traders were betting that the Fed would announce another 0.25% rate hike — but that it will be forced to cut rates at least twice before the end of the year as economic growth slows to a crawl.  

Others disagreed about how exactly this all plays out. In an emailed statement, Seema Shah, the chief global strategist at Principal Asset Management, said that with inflation still elevated and sticky and with the broad economic picture still looking ‘fairly robust,’ the Fed would be more likely than not to keep additional rate hikes on the table.

‘Provided the economic data slows only gently and inflation remains elevated, and the banking sector volatility is fairly contained, we think a June hike is still possible,’ she wrote. ‘Indeed, we believe there is a higher risk of a rate hike in June than what the market is currently pricing in.’

That is largely the view of economists at the Citigroup, as well. In a note to clients published Sunday, the group said it expected the Fed to strike a “hawkish” tone in its latest language announcing the expected rate hike — meaning it will indicate inflation has not yet been tamed and, therefore, interest rates must remain elevated for longer.

The Citi analysts cite recent price-level data that has continued to come in higher than expected. The graphic below from the Atlanta Federal Reserve illustrates this:

‘Rather than signaling a pause, the committee will want to preserve the option for further rate hikes,’ the Citi economists write. ‘In our base case the Fed will raise rates by 25bp [0.25%] this week and again in June and July.’

Those forecasts were countered elsewhere. Heading into Wednesday, the chorus of voices calling for the Fed to pause kept growing. On Tuesday, Sen. Elizabeth Warren, D-Mass., and Rep. Pramila Jayapal, D-Wash., called on Fed Chair Jerome Powell to halt rate hikes entirely, warning that too many increases would cost a growing cohort of people their jobs.

‘We believe that continuing to raise interest rates would be an abandonment of the Fed’s dual mandate to achieve both maximum employment and price stability and show little regard for the small businesses and working families that will get caught in the wreckage,” they wrote.

Analysts at Nomura global financial services group offered something of a middle ground: While they forecast the Fed would raise the rate by the expected 0.25%, they said it will prove a “dovish hike” as the central bankers replace previous language that signaled additional hikes will be necessary, planning to take a more wait-and-see approach.

Perhaps the best summation of the economic crosswinds facing the Fed was found in an anonymous response to the monthly report from the Institute for Supply Management, which showed a modest increase in sentiment among producers for April.

‘We seem to be in a season of contradictions,’ said the respondent, identified only as an executive at a metals manufacturing firm. ‘Business is slowing, but in some ways, it isn’t. Prices for some commodities are stabilizing, but not for others. Some product shortages are over, others aren’t. Trucking is more plentiful, except when it isn’t. There’s uncertainty one day, but not the next. The next couple of months should provide answers — or not. It’s hard to make projections at the moment.”

For Shah, the prevailing crosscurrents signal the worst outcome of all.

‘The most dangerous risk for financial markets currently is stagflation — the risk of the Fed failing to deliver sufficient tightening, permitting a resurgence in inflation later on in the year,’ she wrote.