Federal Reserve Chairman Jerome Powell said the central bank was likely to raise interest rates in the coming months but more slowly than previously.
Fed officials left rates unchanged last week after lifting them at 10 straight policy meetings to combat inflation. But investors, consumers and borrowers shouldn’t think they were done, Powell told the House Financial Services Committee on Wednesday.
“Given how far weve come, it may make sense to move rates higher but to do so at a more moderate pace,” The Wall Street Journal (WSJ) quoted Powell as saying.
Inflation and economic activity havent slowed as much as many officials anticipated this year, casting more uncertainty over how high they might lift rates this year, WSJ said.
Fed officials see a risk that their past rate increases, together with recent banking-industry stresses, will eventually create a sharper-than-anticipated slowdown. They are trying to balance that against the risk that the economy proves more resilient than expected and inflation stays too high, requiring them to increase rates higher than otherwise.
At their policy meeting last week, officials left the benchmark federal-funds rate in a range between 5% and 5.25%. Most of them projected two more increases this year, which would take it to a 22-year high. On Wednesday, Powell called those expectations “a pretty good guess of what will happen if the economy performs as expected.” After holding the fed-funds rate near zero during the Covid-19 pandemic, the Fed had raised the rate at every meeting since March 2022 by a cumulative 5 percentage points, the most rapid series of increases since the 1980s. Officials slowed their hikes this year, lifting the rate by a quarter percentage point at their past three meetings, most recently in May.
Powell compared the Feds latest action to a driver that, after pulling off the highway, proceeds at a slower speed to avoid missing the ultimate destination.
The Fed fights inflation by slowing the economy through raising rates, which causes tighter financial conditions such as higher borrowing costs, lower stock prices and a stronger dollar.
Ahead of last weeks decision, Powell and some colleagues had hinted at a potential compromise in which officials would forgo a rate rise in June while leaving open the prospect of an increase at their July 25-26 meeting.
On Wednesday, Powell said officials would “make our decisions meeting by meeting, based on the totality of incoming data.” Investors in interest-rate futures markets on Wednesday saw a nearly 75% probability that the Fed would raise rates next month.
Some Fed officials became more doubtful in March of the need to lift rates further after the run on Silicon Valley Bank, which resulted in the failures of three midsize banks. They saw that higher funding costs for many other banks risked causing a credit crunch, particularly if banks face further losses from defaults on commercial mortgages backed by properties such as office buildings whose values have tumbled recently. They judged that such a lending pullback would mean they could raise rates less than otherwise.
Source: Qatar News Agency