In a bold move to combat rising inflation, the US Federal Reserve raised interest rates to their highest level in 16 years on Wednesday, making it the tenth increase in 14 months.
The move has sharply increased borrowing costs across the world’s largest economy, leading to a slowdown in sectors such as housing and contributing to the recent failures of three US banks.
According to Federal Reserve Chair Jerome Powell, this latest hike may be the last one for now, saying the bank is “no longer saying that we anticipate” additional interest rate increases. However, Powell also refused to rule out further action, emphasizing that the bank will continue to be guided by incoming data.
The Fed began raising interest rates aggressively last year when prices in the US were soaring at the fastest pace in decades. Since then, inflation has shown signs of moderating, with March’s inflation rate standing at 5% – the lowest level in nearly two years – though still well above the Fed’s target rate of 2%.
Many economists believe that the Fed’s decision to pause now is a prudent one as the risks to the economy as activity slows are growing.
The fear of a recession is very much present in the economy today, says Gregory Daco, chief economist at EY-Parthenon. He notes that the inflation battle is not over, but the situation is one of gradual disinflation.
In response to the news, customers have become more cautious in recent months, leading to a cutback in borrowing and a reduction in business activity. However, many remain hopeful that any slowdown will be mild and relatively short-lived.