Fed delivers small interest rate hike, opens door to pause in tightening cycle

The US central bank raised its benchmark overnight interest rate by a quarter of a percentage point to the 5.00%-5.25% range, as expected by financial markets, but in doing so dropped from its policy statement language saying that it "anticipates" further rate increases would be needed.

The change doesn't foreclose the central bank's policy-setting committee from hiking rates again when it meets in June, but Fed Chair Jerome Powell said it was now an open question whether further increases will be warranted in an economy still facing high inflation, but also showing signs of a slowdown and with risks of a tough credit crackdown by banks on the horizon.

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.

Top of mind for Powell: inflation and the impact of a credit tightening Fed officials feel is still evolving in the wake of both higher interest rates and a financial sector rattled by the recent failure of three US banks.

Powell said he hoped the Fed would be able to "draw a line" under the recent spate of bank failures with the takeover of First Republic this week by J.P. Morgan Chase.

Risks around a US 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.

"I would just say this it's essential that the debt ceiling be raised in a timely way so that the US government can pay all of its bills when they're due," Powell said. "A failure to do that would be unprecedented. We'd be in uncharted territory and the consequences to the US economy would be highly uncertain and could be quite adverse."

Reuters