FOMC Raises Fed Funds Rate to 16-year High

At today’s meeting of the Federal Open Market Committee, the target for the federal funds rate was increased by 25 basis points to a range of 5.00%-5.25%. This was the tenth consecutive meeting at which the funds rate target was raised. Over this period, the target for the fed funds rate has been increased by 500 basis points. Today’s increase followed a similar size action at each of the last two meetings and pushed the rate up to its highest level since July 2007.

In the rate increase announcement, the FOMC continued to express concern over the impact of recent turmoil in the banking sector on credit conditions and hence the economy. The statement noted that the recent turmoil would likely weigh on economic activity ahead but that the Committee remains focused on inflation risks. Hence the increase in the target as the statement noted that “inflation remains elevated” and well above the 2% target. However, in his press conference following the meeting, Chair Powell noted that the likely reduced availability of credit owing from the banking sector turmoil would mean that the Fed would not have to raise the fed funds rate as high as it would have had to otherwise.

The statement did allow for the long-expected pause in rate hikes, though only vaguely. Previously, the statement had noted that the Committee anticipated some additional tightening of policy, implying further hikes ahead. However, today’s statement said only that additional policy firming “may be appropriate” and that whether or not additional tightening would be required will be determined by the incoming data reflecting the cumulative impact of tightening to date. Chair Powell noted that in the Summary of Economic Projections released after the March FOMC meeting, the median expectation was that the peak rate target would be 5.00%-5.25%, implying that the FOMC could pause after today’s increase.

In the aftermath of recent financial market events and increasing market concern over the possibility of recession, the statement also indicated that “The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals.”

In addition, balance sheet reduction will continue on course with the announcement stating that “The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously released plans.”

Each member of the FOMC voted in favor of today’s action.