US interest rates reached their highest level since 2007 in May as the Federal Reserve raised its key federal funds rate by 25 basis points to a range of 5% to 5.25%. This was the Fed’s tenth rate increase since it began its current cycle of tightening in March 2022.
- The Fed is now expected to pause its tightening action
- Jerome Powell refused to rule out further increases
- The Fed said the banking system was “sound and resilient”
US interest rates reached their highest level since 2007 in May as the Federal Reserve (Fed) raised its key federal funds rate by 25 basis points to a range of 5% to 5.25%. This was the Fed’s tenth rate increase since it began its current cycle of tightening in March 2022.
“We’re getting close or maybe even there” (Fed Chair Jerome Powell)
The increase was widely expected; nevertheless, against a backdrop of faltering economic growth , the Fed is now expected to pause its tightening action. Fed Chair Jerome Powell commented: “It’s possible that this time is really different … We’re getting close or maybe even there”. Nevertheless, Chair Powell refused to rule out further increases, stating: “We’ll be driven by incoming data meeting by meeting”. The annualised rate of consumer price inflation in the US eased from 6% to 5% in March, but is still running well head of the Fed’s 2% target.
Chair Powell highlighted increased headwinds to the economy, including the recent collapse of several US banks, and warned that tighter credit conditions for households and businesses were likely to weigh on economic activity, hiring and inflation. He also reiterated the importance that the debt ceiling should be raised in a timely manner, warning that failure would be “unprecedented” and that any the consequences for the US economy would be “highly uncertain”. Meanwhile, the recent failure of several US banks has undermined confidence in the US banking system, although the Fed maintained that it remains “sound and resilient”.
