Pinned
Jeanna Smialek
What to know about the Fed’s latest move.
Federal Reserve officials raised interest rates by a quarter-point on Wednesday in the tenth straight move in their fight against rapid inflation — but they also opened the door to a possible pause in rate increases.
Central bankers lifted rates to a range of 5 percent to 5.25 percent, a level they have not reached since the summer of 2007. The move capped the fastest series of rate increases since the 1980s, as the central bank led by Chair Jerome H. Powell attempts to slow the economy and weigh down price increases.
Here’s what to know about the central bank’s latest move:
In their statement announcing the decision, Fed policymakers indicated that they will watch to see whether future rate moves are necessary. That marks a shift in stance: For months, they had assumed that additional increases would be needed. This opens the door to a possible pause in rate increases.
“In determining the extent to which additional policy firming may be appropriate to return inflation to 2 percent over time, the committee 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,” the policy-setting Federal Open Market Committee said in its release. The “may” in the statement is a signal that officials are not confident that further moves will absolutely be necessary.
In his news conference after the rate announcement, Mr. Powell said that “a decision on a pause was not made today.” He added that “we’ll approach that question at the June meeting.”
Investor bets on where interest rates go from here are tilted toward a pause at the Fed’s next meeting and then lower interest rates later in the year. (Mr. Powell said that cutting interest rates this year was “not in our forecast.”) One calculation put the likelihood that the Fed would hold off changing rates when it meets in June at more than 80 percent.
The Fed does not “have an agenda to further consolidate banks,” Mr. Powell said, in response to a question about the seizure and sale of First Republic Bank to JPMorgan Chase, already the country’s largest bank. Mr. Powell said it was a good policy to limit the expansion of the biggest banks, but that exceptions made sense in cases of bank failures. He also said that credit conditions were tightening following the banking turmoil, which could slow the economy.
Mr. Powell said it was “essential” that the nation’s debt limit is raised in a timely way. “It’s very important that this be done,” he added, noting that the Fed does not give advice to politicians. The consequences for the U.S. economy of a debt default could be dire, he said. “We shouldn’t even be talking about a world in which the U.S. doesn’t pay its bills,” he said.
May 3, 2023, 3:38 p.m. ET
Joe Rennison
The S&P 500 skidded at the end of Powell’s press conference, down 0.5 percent, having initially reacted to the Fed’s policy announcement positively. Investors appeared to react to Powell repeating that the central bank does not expect to cut interest rates this year, with interest rates remaining higher for longer weighing on the market.
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May 3, 2023, 3:27 p.m. ET
Jeanna Smialek
And that is a wrap! Jerome H. Powell, the Fed chair, made it clear that the central bank may pause interest rate increases as soon as their June 13-14 meeting — but that officials want to leave their options open for now.
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May 3, 2023, 3:33 p.m. ET
Jeanna Smialek
Here are other takeaways...
May 3, 2023, 3:33 p.m. ET
Jeanna Smialek
Fed staff economists are projecting a mild recession starting this year. Powell said he himself forecasts the economy may be able to avoid a downturn.
May 3, 2023, 3:34 p.m. ET
Jeanna Smialek
Powell avoided giving Congress too much advice, but said it’s essential to raise the nation’s debt limit.
May 3, 2023, 3:34 p.m. ET
Jeanna Smialek
He said that recent bank turmoil is likely to lead to less lending from mid-sized banks, but made clear that the Fed is still assessing the fallout.
May 3, 2023, 3:34 p.m. ET
Jeanna Smialek
The Fed expects inflation to fall only slowly. Assuming that is the case, Powell said forthcoming rate cuts — which many investors expect — would not be appropriate.
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May 3, 2023, 3:21 p.m. ET
Ben Casselman
Asked whether the Fed considered pausing at this meeting, Powell says that support for another increase was “very strong across the board.” But, he says, there was a sense that “we’re getting close or maybe even there” — suggesting yet again that a pause in June is possible.
May 3, 2023, 3:17 p.m. ET
Alan Rappeport
Asked if he’s had any regrets with how he’s handled bank supervision, Powell appeared to invoke Frank Sinatra and replied: “I’ve had a few.”
May 3, 2023, 3:11 p.m. ET
Alan Rappeport
Back to the debt limit and the standoff taking place in Washington, Powell says, “We shouldn’t even be talking about a world in which the U.S. doesn’t pay its bills.”
May 3, 2023, 3:08 p.m. ET
Joe Rennison
Cutting interest rates this year is “not in our forecast” says Powell, in response to a question about investors already pricing in swift cuts to interest rates as soon as September.
May 3, 2023, 3:11 p.m. ET
Joe Rennison
For those cuts to materialize, Powell says inflation would have to fall much faster than the central bank expects.
May 3, 2023, 3:11 p.m. ET
Joe Rennison
His response was followed by a slide in the S&P 500, which has now inched negative for the day.
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May 3, 2023, 3:08 p.m. ET
Ben Casselman
Powell throws cold water on the notion that the Fed could cut rates later this year — although he left open the possibility in the event that inflation and the economy both cool much faster than policymakers anticipate.
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May 3, 2023, 3:04 p.m. ET
Jim Tankersley
Here’s that progressive critique we discussed earlier — Powell is asked if he thinks high corporate profit margins are driving inflation. He effectively is saying no, he thinks margins are being driven up by imbalances between supply and demand, and that they will come down soon.
May 3, 2023, 3:02 p.m. ET
Ben Casselman
For months now, the central question for the Fed has been whether it can bring down inflation without causing a recession. Historically, there aren’t many examples of that happening. But Powell says it remains possible that “this time is different.” He cites the recent decline in job openings without an increase in unemployment.
May 3, 2023, 3:00 p.m. ET
Ben Casselman
Powell says wage growth is still “a couple percentage points above what would be consistent” with the Fed’s 2 percent inflation target. Jeanna and I wrote about the wage data on Friday.
May 3, 2023, 3:03 p.m. ET
Ben Casselman
We’ve seen clear signs of a slowdown in housing, manufacturing, business investment, and recently in consumer spending as well. Job openings, too, have fallen in recent months. But both wage growth and inflation have stayed higher than the Fed is comfortable with.
May 3, 2023, 3:03 p.m. ET
Ben Casselman
“By the way,” Powell adds, “I do not think that wages are the principal driver of inflation.”
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May 3, 2023, 2:59 p.m. ET
Jim Tankersley
An interesting exchange just now with Powell over whether the Fed would accept a prolonged stretch of 3 percent inflation. Powell repeated that 2 percent is the Fed’s target, but he also made clear he doesn’t expect to get there right away. That could matter a lot for the path of interest rates over the next year or two.
May 3, 2023, 3:01 p.m. ET
Alan Rappeport
Powell also said getting to 2 percent will “take some time” and will not be a smooth process.
May 3, 2023, 2:59 p.m. ET
Lydia DePillis
Powell, asked why the committee decided to raise rates again even though the effects of those increases have become obvious, through mechanisms such as the slowing housing market and declining job openings, said "We always have to balance the risk of not doing enough, and not getting inflation under control, against the risk of slowing down economic activity."
May 3, 2023, 2:56 p.m. ET
Ben Casselman
Powell once again declines to say the Fed has decided to pause increases. The economic data needs to “sufficiently accumulate” to convince Fed officials that they can stand down on further increases, he says.
May 3, 2023, 2:53 p.m. ET
Jeanna Smialek
Mid-size banks have been tightening lending standards, Mr. Powell says, laying out some details about that upcoming loan officer survey we’re all waiting for. But he also notes that those standards started tightening late last year.
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May 3, 2023, 2:50 p.m. ET
Ben Casselman
“I don’t have an agenda to further consolidate banks,” Powell says.
May 3, 2023, 2:50 p.m. ET
Ben Casselman
This in response to a question about whether the acquisition of First Republic by JP Morgan Chase — already the country’s biggest bank — posed a risk to financial stability. Powell says it’s a good policy to limit the expansion of the biggest banks, but that it makes sense to have exceptions in cases of bank failures.
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May 3, 2023, 2:43 p.m. ET
Lydia DePillis
When asked whether Fed staff still expect a mild recession, Mr. Powell said that the latest forecast was “broadly similar to that.”
May 3, 2023, 2:43 p.m. ET
Ben Casselman
Powell won’t commit to a pause in rate increases, but he leaves the door open to one, and he acknowledges that the removal of the language around anticipating future increases was “a meaningful change.”
May 3, 2023, 2:42 p.m. ET
Jeanna Smialek
Powell gets asked about the debt limit. “From our standpoint,” he says "it’s essential” that the debt limit is raised in a timely way. He notes that the Fed does not give advice to politicians, but “it’s very important that this be done.”
May 3, 2023, 2:43 p.m. ET
Jeanna Smialek
He underlines that nobody should assume that the Fed can protect the economy if we breach the debt limit. This is an issue we’ve written about, including here.
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May 3, 2023, 2:41 p.m. ET
Jim Tankersley
“We’ll approach that question at the June meeting,” Powell says, effectively punting the decision on pausing rate hikes for another month. Will be interesting to see what markets make of that.
May 3, 2023, 2:39 p.m. ET
Jeanna Smialek
“A decision on a pause was not made today,” Powell says.
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May 3, 2023, 2:38 p.m. ET
Joe Rennison
Stocks began to subside as Mr. Powell reiterated the Fed’s commitment to lowering inflation, acknowledging the hardship that it has already brought many households across the country. But such a strong commitment to lower inflation could mean keeping interest rates higher for longer, weighing on the stock market.
May 3, 2023, 2:37 p.m. ET
Jeanna Smialek
Powell says that credit conditions are tightening following the banking turmoil. This is notable, because Fed officials likely have access to surveys of senior loan officers that have not yet been released to the public -- and which economists are anxiously awaiting.
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May 3, 2023, 1:09 p.m. ET
Joe Rennison
Markets are muted ahead of the Fed’s rate announcement.
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Stocks nudged higher on Wednesday morning, as investors looked for signs that the Federal Reserve was preparing to end its campaign of interest-rate increases that have contributed to the recent turmoil in the banking sector.
The S&P 500 rose slightly, after sliding sharply on Tuesday following the seizure of First Republic, the third U.S. bank to collapse since March.
Investors expect the Fed to raise interest rates by a quarter of a percentage point on Wednesday, adding to the pressure on banks.
As inflation cools and the economy slows, many investors hope Wednesday’s increase will be the Fed’s last for a while, but some investors and analysts caution that even if the Fed does pause, the fight to bring down inflation is not over.
“A Fed pause is not the same as a Fed pivot,” noted Gargi Chaudhuri, head of investment strategy for the Americas at BlackRock iShares.
Jerome H. Powell, the Fed char, is balancing the central bank’s focus on taming inflation against “the growing list of evidence of the damage that higher rates are having on the real economy,” according to analysts at BMO Capital Markets.
Investors are focused on Mr. Powell’s comments in a news conference after the central bank’s announcement on rates. If investors perceive Mr. Powell to underplay the risks bubbling up in the economy, focusing instead on the need to keep rates elevated to tame inflation, then markets could react negatively.
“The most relevant information will be the tone of the press conference and how the chair frames the distribution of risks surrounding the next rate move,” BMO’s analysts noted.
May 3, 2023, 1:02 p.m. ET
Jeanna Smialek
How the Fed is tied up in bank turmoil.
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The Federal Reserve is meeting after weeks of tumult at midsize and large banks.
Some of the volatility roiling lenders stems from their exposure to the Fed’s rate increases — and the troubles could prompt many banks to tighten up when it comes to extending credit to businesses and consumers.
Here’s what has happened in the banking system over the past two months, and what it could mean for the Fed:
March 10: Silicon Valley Bank failed after a stunningly rapid run by depositors. The bank had two key vulnerabilities. The market value of its long-term securities had fallen as rates had risen, and it had a big share of depositors above the $250,000 federal deposit insurance limit. Those customers were more likely to run at the first sign of trouble.
March 12: The government announced that Signature Bank had also failed. It simultaneously said that it would protect depositors at both banks, and announced a new Fed program to help banks to make it through a rough patch.
March 16: Wall Street’s largest banks injected $30 billion into First Republic, which was facing deposit outflows, to try to shore it up.
March 19: UBS, Switzerland’s largest bank, agreed to buy its smaller rival, Credit Suisse, for about $3.2 billion. Credit Suisse’s weaknesses had gone back years, but jitters in the banking system put a spotlight on them.
March 22: The Fed raised rates in spite of the bank tumult, but signaled that they expected it to slow growth — and that they likely wouldn’t be raising rates as much as they otherwise would have, in light of the turmoil. Signs that bank issues are weighing on lending begin to surface anecdotally by late March.
April 28: Federal regulators released reports explaining what went wrong with their oversight of Silicon Valley Bank and Signature Bank. The Fed’s review of the Silicon Valley Bank situation suggested that issues including regulatory rollbacks, a slow and contemplative culture around supervision, and understaffing could have contributed. Fed supervisors had flagged big issues at the bank, but the firm had eluded more aggressive oversight for years in part because of Trump-era changes.
May 1: First Republic was taken over by the F.D.I.C. and immediately sold to JPMorgan Chase. The deal was announced in the early hours of Monday morning after a frantic night of deal-making, as the government tried to prevent bank nervousness from spreading.
May 2: Bank stocks continued to shudder in the wake of the First Republic deal, as concerns about midsize lenders persisted.
May 3: Fed officials are likely to discuss what they’re hearing about lending conditions from loan officers and business contacts across the country at their meeting. Central bankers will release a policy statement at 2 p.m., and Jerome H. Powell, the Fed chair, could give hints at what they are seeing during his post-meeting news conference at 2:30 p.m.
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