The Federal Reserve on the afternoon of May 3 raised interest rates by another quarter of a point to 5.25%. In its announcement of the rate increase, the Fed said that economic activity expanded at a modest pace in the first quarter of 2023 with robust job gains in recent months and the unemployment rate remaining low. The Fed added, however, that inflation remains elevated.
Federal Reserve Chairman Jerome Powell, in a news conference following release of the interest rate hike announcement, 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 and financial developments.”
Powell said that the fed will determine on a meeting-by-meeting basis whether to continue raising interest rates. With today’s announcement, the Fed has raised interest rates by 5% in a little more than a year. Powell said that there has been a tightening of demand in the most interest-sensitive sectors of the economy, particularly housing and investment. He said it will take time for the full effects of the interest rate hikes to be realized, especially on inflation.
“We are prepared to do more if greater monetary policy restraint is warranted,” Powell said. “Reducing inflation is likely to require a period of below-trend growth and some softening of labor market conditions.”
Powell brought up the recent bank failures and said that a review of the way the Fed regulated the failed Silicon Valley Bank underscores the need to address the Fed’s rules and supervisory practices to make for a stronger and more resilient banking system.
“Conditions in that sector have broadly improved since early March, and the U.S banking system is sound and resilient.,” Powell said. “We will continue to monitor conditions in this sector. We are committed to learning the right lessons from this episode and will work to prevent events like these from happening again.”
Powell reported that the U.S. economy slowed significantly last year, with real Gross Domestic Product rising at a below-trend pace of 0.9%. The pace of economic growth in the first quarter of this year continued to be modest, at 1.1%, despite a pickup in consumer spending. Activity in the housing sector remains weak, largely reflecting higher mortgage rates. Higher interest rates and slower output growth also appear to be weighing on business fixed investment. The labor market remains very tight.
Powell said that the Fed understands that its actions affect communities, families and businesses across the country.
“Everything we do is in service to our public mission,” Powell said. “We at the Fed will do everything we can to achieve our maximum employment and price stability goals.”
