The Fed’s rate hike Wednesday comes as other major central banks are also tightening credit. Hiring has decelerated, job postings have declined and fewer people are quitting their jobs for other, typically higher-paying positions. Manufacturing, too, is weakening.Įven the surprisingly resilient job market, which has kept the unemployment rate near 50-year lows for months, is showing cracks. The economy appears to be cooling, with consumer spending flat in February and March, indicating that many shoppers have grown cautious in the face of higher prices and borrowing costs. The Fed’s decision Wednesday came against an increasingly cloudy backdrop. Powell reiterated his warning that “no one should assume that the Fed can protect the economy from the potential short and long-term effects of a failure to pay our bills on time.” debt could potentially lead to a global financial crisis. The debt limit caps how much the government can borrow, and a first-ever default on the U.S. Yellen warned that the nation could default on its debt as soon as June 1 unless Congress agrees to lift the debt limit before then. At his news conference, Powell noted that a Fed survey found that mid-sized banks were already tightening credit before the banking upheavals and have done so even more since the failures.įrom Silicon Valley Bank’s failure to the rescue of First Republic, keep up with the latest developments in the crisis of confidence afflicting banks in California and beyond. The three banks that collapsed had bought long-term bonds that paid low rates and then rapidly lost value as the Fed sent rates higher. “Inflation pressures continue to run high, and the process of getting inflation back down to 2% has a long way to go,” Powell said. Inflation has dropped from a peak of 9.1% in June to 5% in March but remains well above the Fed’s 2% target rate. In its statement and at Powell’s news conference, the Fed made clear Wednesday that it doesn’t think its string of rate hikes have sufficiently cooled the economy, the job market and inflation. The Fed’s latest move, which raised its benchmark rate to roughly 5.1%, could further increase borrowing costs. The Fed’s rate increases over the last 14 months have more than doubled mortgage rates, elevated the costs of auto loans, credit card borrowing and business loans, and heightened the risk of a recession. “As such, there is a risk that the pause is temporary.” Still, if inflation were to accelerate, the Fed “won’t hesitate to resume hiking interest rates because they’re determined to break inflation’s back,” said Ryan Sweet, chief economist at Oxford Economics.
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