The Federal Reserve has increased rates by a quarter point and signaled the possibility of an end to future hikes, reflecting the central bank

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On Wednesday, the Federal Reserve announced that it would raise interest rates by a quarter of a point and signaled a potential end to future hikes. The decision came amid concerns about U.S. economic fragility and over the objections of some lawmakers, who urged the Fed to stop rate hikes that they insisted could cause a recession and excessive job losses.

Chairman Jerome Powell said during a news conference that "a decision on a pause was not made today" but noted the change in the statement language around future policy firming was "meaningful." The post-meeting statement had only clarified the future pace of rate hikes, not by what it said but by what it didn't say.

The document omitted a sentence present in the previous statement saying that "the Committee anticipates that some additional policy firming may be appropriate" for the Fed to achieve its 2% inflation goal. The statement also tweaked the language to outline the conditions under which "additional policy firming may be appropriate." Previously, the FOMC had framed the forward guidance around how it would determine "the extent of future increases in the target range."

The statement reiterated that the Fed "will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments." Taken together, the moves are at least a tenuous nod that while tight policy could remain in effect, the path ahead is less clear for actual interest rate hikes as policymakers assess incoming data and financial conditions.

The decision to raise rates came amid concerns about U.S. economic fragility and over the objections of some lawmakers, who urged the Fed to stop rate hikes that they insisted could cause a recession and excessive job losses. However, the labor market has remained strong since the increases started in March 2022, and inflation is still well above the 2% target that policymakers consider optimum.

Multiple officials have said rates probably will need to stay elevated even if the hikes are put on hold. "Inflation has moderated somewhat since the middle of last year; nonetheless, inflation pressures continue to run high, and the process of getting inflation back down to 2% has a long way to go," Powell told reporters.

Along with inflation, the Fed has had to deal with tumult in the banking industry that has seen three mid-size banks shuttered. Though central bank officials insist the industry is stable, tightening in credit conditions and heightened, regulations ahead are expected to weigh further on economic growth that was just 1.1% annualized in the first quarter.

The post-meeting statement noted that "tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation." The language was similar to the March statement, which came just after the collapse of Silicon Valley Bank and Signature Bank. The Fed's own economists at the March FOMC meeting warned that a shallow recession is likely due to the banking issues.

Issues in the financial sector have continued, with JPMorgan Chase on Monday taking over the First Republic. Powell said such a transaction was an "exception." Although it wasn't ideal, Powell said it was a "good outcome" for the banking system.

The statement from this week's meeting also reiterated that economic growth has been "modest" while "job gains have been robust" and inflation is "elevated." "Although the FOMC statement is slightly more dovish by what it left out from the last statement, it nonetheless makes it clear that the Fed remains data dependent as it acknowledges that inflation remains elevated but underscores that it wants to monitor the cumulative effects of its aggressive rate hike campaign," said Quincy Krosby, chief global strategist at LPL Research.

Overall, the Fed's decision to increase rates a quarter point while signaling a potential end to hikes reflects the central bank's ongoing balancing act between containing inflation and supporting economic growth. With inflation still above target but showing signs of moderation and the economy facing potential headwinds from banking issues and slowing growth in certain sectors, the Fed is likely to continue monitoring incoming data and adjusting policy as needed. While markets may anticipate a rate cut later this year, the Fed's focus on inflation and the labor market's resilience suggests that any further policy moves will be data-dependent and carefully calibrated.
 
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