Balancing Act: Fed's Tenth Interest Rate Hike Amid Inflation Fears, Recession Risks, and a Banking Crisis

By Washington Post
Posted on 05/03/23 | News Source: Washington Post

The Federal Reserve is slated to raise interest rates for the 10th time in just over a year, as officials continue their fight against inflation amid growing fears of a recession.

At the conclusion of their two-day meeting Wednesday, the central bank is expected to announce a quarter-point hike, which would bring the Fed’s benchmark interest rate to a level between 5 and 5.25 percent.

Policymakers are expected to debate whether this May hike gets interest rates high enough to pause the Fed’s aggressive campaign against inflation and give time for their policies to work through the economy. Or they could decide they have more work to do to raise borrowing costs and curb demand for all kinds of investments, from mortgages to car loans to business hiring.

Complicating the Fed’s decision are the ongoing repercussions from this spring’s banking crisis. Fed officials have said the fallout from the failures of Silicon Valley Bank and Signature Bank will slow the economy. Tremors in the financial system have made banks more reluctant to loan money, curbing demand in a way that mimics an interest rate hike. But policymakers will need to debate – and then explain to the public – just how significant that broader slowdown will be.

“They will surely be thinking hard about how fast the economy is cooling, and the issue about the banking crisis is really front and center in that regard,” said Karen Dynan, a former chief economist at the Treasury Department who is now at Harvard University.

Dynan added that while the bank tumult isn’t expected to alter the Fed’s quarter-point rate hike, “the interesting thing is what they’re going to signal about the future, whether they’re going to change their rhetoric.”

The Fed’s interest rate decision will be announced at 2 p.m. Eastern time. Half an hour later, Fed Chair Jerome H. Powell will appear at a news conference, where he’s likely to get questions on the health of the banking system, the future of rates, expectations for inflation and the odds of a recession.