Fed economists have estimated that tighter credit resulting from the bank failures will contribute to a “mild recession” later this year, thereby raising the pressure on the central ban…
WASHINGTON — The Federal Reserve reinforced its fight against high inflation Wednesday by raising its key interest rate by a quarter-point to the highest level in 16 years. But the Fed also signaled that it may now pause the streak of 10 rate hikes that have made borrowing for consumers and businesses steadily more expensive.
Still, the Fed’s statement offered little indication that its string of rate hikes have made significant progress toward its goal of cooling the economy, the job market and inflation. Inflation has fallen from a peak of 9.1% in June to 5% in March but remains well above the Fed’s 2% target rate. The banking upheaval might have played a role in the Fed’s decision Wednesday to consider a pause. Chair Jerome Powell had said in March that a cutback in lending by banks, to shore up their finances, could act as the equivalent of a quarter-point rate hike in slowing the economy.
The Fed’s decision Wednesday came against an increasingly cloudy backdrop. 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. Manufacturing, too, is weakening. Goldman Sachs estimates that a widespread pullback in bank lending could cut U.S. growth by 0.4 percentage point this year. That could be enough to cause a recession. In December, the Fed projected growth of just 0.5% in 2023.
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