Fed hikes rates despite recession fears

The Federal Reserve voted to raise interest rates Wednesday by another 0.25 percentage points, brushing aside concerns about the financial sector and an expected recession later this year.

The Fed’s rate-setting committee voted unanimously Wednesday to boost its baseline interest rate to a range of 5 to 5.25 percent, the point at which Fed officials expected in March to stop hiking rates, according projections from the Fed’s last meeting.

The latest rate hike is the 10th in a row since the Fed began its program of quantitative tightening in March of last year.

Over the past 14 months, the Fed has boosted borrowing costs and shrunk its balance sheet in a historically swift battle with inflation.

There is still some doubt about what the Fed will do at its next meeting in June as both the broader economy and inflation continue to slow. The collapse of First Republic Bank and deepening concerns about financial stability have also shaken confidence in the economy.

“The U.S. banking system is sound and resilient,” according to a Wednesday statement from the Federal Open Market Committee (FOMC), the Fed’s rate-setting panel.

Even so, the FOMC acknowledged that “tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain.”

The Fed may pause on rate hikes and fulfill its March projections for the terminal rate. A rebound in inflation, however, could push Fed officials to keep boosting rates.

Inflation has been decreasing steadily since the middle of last year, with the annual inflation rate falling to 5 percent in March, according to the Labor Department’s consumer price index.

The broader economy is also slowing under the weight of Fed rate hikes.

U.S. gross domestic product grew at an annualized rate of 1.1 percent in the first quarter, according to Commerce Department data, much slower than the 2.6 percent growth rate in the final three months of 2022.

While the unemployment rate has remained near 50-year lows, job gains have been slowing.

Economists expect this trend to continue with the Friday release of the April jobs report.

“The April jobs report should confirm that the labor market slowdown is well underway and that the economy is cooling,” EY economist Lydia Boussour wrote in a Tuesday analysis.

Boussour expects the U.S. to have added 175,000 jobs in April, “a result that would imply a marked downshift in the three-month moving average of job growth from 345,000 to a much cooler 246,000,” she wrote.

Job openings also dipped to 9.6 million in March, according to data from the Labor Department Job Openings and Labor Turnover Survey (JOLTS) released Tuesday, the lowest number in nearly two years.

“JOLTS was a good case for signaling a pause in June,” said Claudia Sahm, a former Fed research director and founder of Sahm Consulting, in an interview with The Hill.

The failure of three major banks within two months and lingering concerns about the delayed impact of Fed rate hikes are also raising the stakes of future increases.

“Historical recessions related to financial market problems tend to be more severe and persistent than average recessions,” the Fed warned in the minutes of its March rate-setting committee meeting.

Updated at 2:09 p.m.