Fed increases US interest rates again but leaves open possibility of pause in rises

The US Federal Reserve has raised interest rates by a quarter-point in its battle to tame inflation but has left open the possibility that further hikes could be put on hold.

The move on Wednesday, which lifted rates to a range of 5 per cent to 5.25 per cent‚ represents the Fed’s 10th rate increase in a little over a year.

The increase announced on Wednesday will push interest rates to levels last seen in the United States in 2007.

However, the Fed in announcing the increase on Wednesday used language that was subtly different from that in previous statements over recent months.

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It indicated that central bankers would wait and see whether further hikes were needed rather than assuming that they would be necessary.

It did insist, though, that it was “strongly committed” to returning to a 2 per cent inflation rate.

The Fed’s announcement on Wednesday also comes at a time of potential economic instability in the US over the future of the country’s debt ceiling as well as concerns over some regional banks.

[ McGrath warns ECB of ‘real life’ impact of interest-rate hikes ]

Earlier this week that the US Treasury announced that the US could run out of money to pay its bills by the beginning of June if Congress did not raise or suspend the debt limit.

Over the last month or so there have also been three bank failures, most recently First Republic Bank, which was taken over by regulators and sold over the weekend.

The Fed argued in its statement on Wednesday that the US banking system was “sound and resilient”.

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“Economic activity expanded at a modest pace in the first quarter. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated,” it said.

“Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring and inflation. The extent of these effects remains uncertain. ”

It said its federal open market committee “remains highly attentive to inflation risks”.

“The committee seeks to achieve maximum employment and inflation at the rate of 2 per cent over the longer run. In support of these goals, the committee decided to raise the target range for the federal funds rate to 5 to 5.25 per cent.

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“The committee will closely monitor incoming information and assess the implications for monetary policy. In determining the extent to which additional policy firming may be appropriate to return inflation to 2 per cent 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.”

Federal Reserve chairman Jerome Powell said a decision on pausing rate increases had not been made on Wednesday.

However, he described as “meaningful” the removal of the language in its statement on Wednesday around anticipating future increases.

He said the Fed would be “driven by incoming data, meeting by meeting”.

Asked at a press conference about the US debt ceiling, he said: “From our standpoint, it is essential that the debt limit is raised in a timely way.”