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Federal Reserve pushes interest rates above 5% for first time since 2007

The Federal Reserve raised the target range for its benchmark interest rate by 0.25% on Wednesday while leaving its options open on future rate hikes.

The central bank's move pushed its benchmark policy rate, the fed funds rate, to a new range of 5%-5.25%, the highest since September 2007. The Fed said future rate hikes would be contingent on the impact of previous rate hikes on the economy and financial developments.

Fed officials still view inflation as elevated, and note that they remain "highly attentive" to inflation risks.

As part of its most aggressive rate hiking campaign since the 1980s, the US central bank has increased the target range for its benchmark interest rate by 5 percentage points since March 2022. Wednesday's decision was unanimous among voting members of the Federal Open Market Committee (FOMC), the Fed committee that decides on policy.

Fed Chair Jay Powell began his press conference on Wednesday with a discussion of the latest developments in the ongoing bank crisis, which last week saw the FDIC broker a sale of First Republic (FRC) to JPMorgan (JPM).

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Powell said "conditions in that sector have broadly improved since early March, and the US banking system is sound and resilient."

At least twice during Wednesday's press conference, Powell pointed to the "meaningful" change in the Fed's statement that swapped in language about the Fed determining "the extent to which" it may need to raise rates; previously, the Fed said it had "anticipated" future rate hikes.

Still, Powell sought to maintain flexibility on future policy decisions, saying: "A decision on a pause was not made today." Powell did say that among members of the FOMC "there's a sense that we're...much closer to the end of this than the beginning."

Jay Bryson, an economist at Wells Fargo, wrote in a note on Wednesday the Fed's decision could be termed a "hawkish pause."

"The Committee could indeed hike rates by 25 [basis points] on June 14, but that decision will depend crucially on incoming data over the next six weeks," Bryson wrote. "In our view, the bar to a rate hike on June 14 is higher than it has been at past meetings since March 2022."

Asked about the possibility of cutting interest rates, Powell said the central bank's view suggests "inflation [is] going to come down not so quickly. It will take some time. And in that world, if that forecast is broadly right, it would not be appropriate to cut rates."

Federal Reserve Board Chair Jerome Powell speaks during a news conference at the Federal Reserve in Washington, DC, on May 3, 2023. - The Fed has been on an aggressive campaign of interest-rate hikes since March last year, rapidly raising rates to help target high inflation, which remains above its long-term target of two percent. (Photo by SAUL LOEB / AFP) (Photo by SAUL LOEB/AFP via Getty Images)
Federal Reserve Board Chair Jerome Powell speaks during a news conference at the Federal Reserve in Washington, DC, on May 3, 2023. (Photo by SAUL LOEB/AFP via Getty Images) (SAUL LOEB via Getty Images)

In Wednesday's statement, the Fed said, "in determining the extent to which additional policy firming may be appropriate to return inflation to 2% 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 an financial developments."

This language replaces the Fed's framing back in March, which had said the central bank, "anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time."

The Fed noted that tighter credit conditions for households and businesses are likely to weigh on the economy, hiring, and inflation, though the extent of these effects remains uncertain.

The fed funds rate target range lines up with officials' interest rate projections released at the March policy meeting which saw rates peaking in a range of 5%-5.25% and remaining at that level through the balance of the year.

Asked about the impending debt ceiling standoff between the White House and Congress, Powell said that while these are matters for fiscal authorities "nobody should assume that the Fed can protect the economy from the short or long term effects of a failure to pay our bills on time."

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