US Fed Hikes Interest Rate By 25 Basis Points

The Federal Reserve decided to raise the interest rate by a "quarter of a percentage point" (25 basis points) to the 5.00%-5.25% range as per market expectations. The central bank announced a rate hike in a statement released on Wednesday, to tame inflation, with an intent to bring it down to under 2 percent.

The central bank said it seeks to achieve maximum employment and inflation at the rate of 2 per cent over the longer run. "In support of these goals, the Committee decided to raise the target range for the federal funds rate to 5 to 5-1/4 percent," it said.

Since March 2022, the Fed has increased the rate 10 times to cool down the high inflation and also left a window open for the policy committee's decision depending on the economy's inflation point in June. Powell expressed in the press conference that the rate hikes eventually take time to realise.

"We're closer, or maybe even there," Powell said of ending the rate hikes that have boosted the Fed's policy rate by a full 5 percentage points in the 10 meetings since March 2022, a torrid pace for the central bank and one that may now warrant allowing some time for the impact to be felt in full.

Of ending the rate hikes, referring to the previous halt done in 2006, Fed said that "in determining the extent to which additional policy firming may be appropriate," officials would consider how the impact of monetary policy was accumulating in the economy.

Fed officials feel that inflation and the impact of credit tightening are still evolving in the wake of both higher interest rates and a financial sector rattled by the recent failure of three U.S. banks.

At a press conference following the release of the statement, Powell said inflation remains the chief concern, and that it is therefore too soon to say with certainty that the rate-hike cycle is over.

"We are prepared to do more," he said, with policy decisions from June onward to be made on a "meeting-by-meeting" basis.

Although the inflation remains high, it is also showing signs of a slowdown and with risks of a tough credit crackdown by banks on the horizon.

Fed, in the last meeting on March 22, hiked interest rates by 25 basis points and said that its rate-setting panel sought "to achieve maximum employment and inflation at the rate of 2 per cent over the long run".

Powell also said the country's economic activity expanded at a modest pace in the first quarter and job gains had been robust in recent months, and the unemployment rate had remained low while inflation remained elevated.

The recent US Fed policy rate is roughly the same as it was during a financial crisis that occurred 16 years ago. The rate is at par with the Fed officials' projections in March. The policy rate is "sufficiently restrictive" to return inflation to the central bank's 2% target, the officials feel. Inflation is currently still more than twice that target.

Yet job gains "have been robust," the Fed said, and Powell noted that some recent data on falling job openings and lower earnings growth, coupled with historically low unemployment, supported the idea that the economy could slow without a dramatic rise in joblessness.

"The case of avoiding a recession is in my view more likely than that of having a recession," Powell said.

Risks around a U.S. debt limit standoff between Republicans in Congress and Democratic President Joe Biden have added to the sense of caution about trying to tighten financial conditions further.

The shift in the Fed's approach was reflected in U.S. interest rate futures, which showed broad expectations for no hikes at either of the central bank's next two policy meetings