MercoPress. South Atlantic News Agency

US Fed raises interest rate yet again

Further rate increases by the Federal Reserve may lead to recession, it is feared

The US Federal Reserve Wednesday upped its benchmark interest rate by a quarter point to between 5% and 5.25%, its highest level in 16 years, which further tightened credit for businesses and consumers, it was announced.

While the banking system is “healthy and resilient,” turbulence in the sector could inhibit lending, spending, and growth, the Fed explained in a statement.

“The committee will closely monitor incoming information and assess the implications for monetary policy,” the Federal Open Market Committee (FOMC) said in a statement. In a previous declaration in March, the FOMC had said that the committee “anticipates that additional policy tightening may be appropriate.”

“Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation,” the FOMC statement went on. “The extent of these effects remains uncertain. The committee remains very vigilant about inflation risks.”

However, at a subsequent press conference, Fed Chairman Jerome Powell denied that interest rate hikes will be paused because of events in recent weeks in the nation's banking system. “The decision of a pause has not been taken today,” Powell said.

The Fed's decision comes against a sensitive backdrop. On the one hand, the turmoil in the banking sector and the political wrangling over the US debt ceiling could weaken the economy if banks tighten credit and financial markets collapse on the possibility of the nation defaulting. For these reasons, some investors believe it would be unwise not to raise rates further, at least for now.

On the other hand, inflation, although easing, is still above the 2% annual target, so further rate increases risking recession are not to be ruled out. In this scenario, Powell is facing pressure from the political spectrum to stop raising rates. Democratic Senators Elizabeth Warren, Bernie Sanders, Sheldon Whitehouse, and other lawmakers Tuesday sent a letter to Powell saying that the Fed's aggressive actions were threatening to throw millions of people out of work.

“While the Fed should remain flexible to incoming data as it assesses the economy's progress toward achieving lower inflation, the evidence to date suggests that progress can continue to be made without slamming the brakes on the economy and costing millions of Americans their jobs,” the letter read.