Fed hikes interest rate another 0.25%, inflation still 'too high'

The Federal Reserve continued to slow down the pace of interest rate increases as it seeks to tame still-high inflation.

At its March meeting, the Fed raised its benchmark interest rate by 0.25%. That marks the second straight meeting that the Fed’s key committee has delivered an increase of that size. That followed a rapid tightening of monetary policy last year.

Federal Reserve Chairman Jerome Powell summed up the current economic conditions this way: “Inflation remains too high and the labor market continues to be very tight.”

The inflation and jobs data delivered since the meeting came in hotter than expected, Powell said. As a result, the central bank is using its tools to further tighten the economy. This can slow down demand, but also brings down inflation. Already, the economy is showing signs of slowing down, Powell said, even though consumer spending appears to have picked up in the last quarter.

While bringing down inflation remains the goal of the Fed, the central bank is now also focusing on a new front: The banking system stresses brought on by the collapse of Silicon Valley Bank. While Powell stressed that SVB was an outlier, the dramatic run on the bank and eventual closure could lead to tighter credit conditions for households and businesses throughout the economy.

This is leading the Fed to reconsider its rate hikes.

“We no longer state that we anticipate that ongoing rate increases will be appropriate to quell inflation; instead, we now anticipate that some additional policy firming may be appropriate."

That means rates could stay stable. Projections released by the committee now show just one more increase this year. In the Fed's Wednesday statement, Powell said to focus on the words “may” and “some,” rather than “ongoing.” That indicates no firm decision has been made.

Still, the implication of this policy statement is that the economy will tighten, whether it is the work of interest rates or banking. That could lead to a slowdown that will affect consumer demand. In new economic projections, members of the Fed’s key committee see unemployment, which is a key driver of consumer spending, rising to 4.5% this year, though Powell said it was a “highly uncertain estimate.” Currently, unemployment is at a historically low 3.6%. So far, it’s not moving. As a result, interest rates are unlikely to come down this year, as well.