Federal Reserve slows pace of inflation rate hikes again but warns of more action ahead
The US central bank has slowed the pace of interest rate hikes further but indicated more rises are likely despite official figures suggesting price pressures have peaked in the world’s largest economy.
The Federal Reserve revealed its verdict hours before counterparts in the UK and Europe made their next moves in the battle against inflation – with both the Bank of England and European Central Bank set to raise borrowing costs further.
The Fed, as it’s known, raised its target interest rate by a quarter of a percentage point – as financial markets expected – following an aggressive set of increases last year to tame decades-high inflation.
It was lifted to a range between 4.50% to 4.75%.
The statement from the Fed confirmed that policymakers planned to maintain an iron grip on inflation risks through further hikes.
“The committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time,” it read.
Fed chairman Jay Powell later told a news conference that history told him it would be dangerous to take the foot off the gas “prematurely”.
His language was seen as hawkish in the face of the smallest rise in the target rate since last March though markets, which were initially spooked, took some comfort when Mr Powell confirmed its next moves would be determined by the data.
He also confirmed Fed expectations that the US economy would grow this year.
March 2022 was when the Fed made its first move against surging US inflation as post-pandemic price rises were exacerbated around the world by the war in Ukraine.
The Fed had imposed four consecutive hikes of 0.75 percentage points prior to its last meeting in December, when the pace was reduced to a half percentage point rise.
It was at that point, before Christmas, when inflationary pressures were truly seen by policymakers as easing from the four-decade highs seen earlier in 2022 because so-called core inflation had slowed.
Global wheat costs were among those to surge after Russia’s invasion of Ukraine
The cost of things such as oil, gas and many other commodities – outside of central bank control – went through the roof.
These increases later became ingrained in prices across Western economies as costs were passed down supply chains, pressuring central banks to cool economic activity and discourage wage increases that could inflame the inflation problem.
While economists believe inflation has also peaked in the UK and across Europe, the continent’s exposure to the loss of Russian energy flows has inflation more stubborn.
The Bank of England’s next rate decision is revealed at midday on Thursday
The Bank of England is widely expected to lift its rate from 3.5% to 4% on Thursday as a result.
The European Central Bank, which sets the rate path for the 20 countries which use the euro, is expected to impose the same hike in its main deposit rate.
The pound and euro both lost around a third of a cent as the dollar strengthened in the immediate aftermath of the Fed’s decision but both later recovered.
Oil prices, however, were down by 3% as the prospect of more rate tightening was seen as damaging for demand. Brent crude was trading at $83 a barrel.
Richard Carter, head of fixed interest research at Quilter Cheviot, said of the quarter point rate rise: “Investors should not confuse this as the end of the rate hiking cycle, instead a pause for breath as the Federal Reserve looks to continue to fight inflation, while also assessing if further hikes are the way to go.
“The economy has been fairly resilient and the consumer remains in okay shape. Recession could be avoided as a result, but this means we need to prepare for the Fed to continue raising rates for as long as inflation remains elevated.
“The last thing it wants to do is take its foot off the gas too early and stoke a new inflationary cycle,” he wrote.
Business
Mission: Impossible? Chancellor heads to the IMF with a very big challenge – and she’s not alone
There will be much to chew over at the International Monetary Fund’s (IMF) spring meetings this week.
Central bankers and finance ministers will descend on Washington for its latest bi-annual gathering, a place where politicians and academics converge, all of them trying to make sense of what’s going on in the global economy.
Everything and nothing has changed since they last met in October – one man continues to dominate the agenda.
Six months ago, delegates were wondering if Donald Trump could win the election and what that might mean for tax and tariffs: How far would he push it? Would his policy match his rhetoric?
Donald Trump. Pic: Reuters
This time round, expect iterations of the same questions: Will the US president risk plunging the world’s largest economy into recession?
Yes, he put on a bombastic display on his so-called “Liberation Day”, but will he now row back? Have the markets effectively checked him?
Behind the scenes, finance ministers from around the world will be practising their powers of persuasion, each jostling for meetings with their US counterparts to negotiate a reduction in Trump’s tariffs.
That includes Chancellor Rachel Reeves, who is still holding out hope for a trade deal with the US – although she is not alone in that.
Read more:
PM and Trump step up trade talks
Ed Conway on the impact of US tariffs
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Could Trump make a deal with UK?
Are we heading for a recession?
The IMF’s economists have already made up their minds about Trump’s potential for damage.
Last week, they warned about the growing risks to financial stability after a period of turbulence in the financial markets, induced by Trump’s decision to ratchet up US protectionism to its highest level in a century.
By the middle of this week the organisation will publish its World Economic Outlook, in which it will downgrade global growth but stop short of predicting a full-blown recession.
Others are less optimistic.
Kristalina Georgieva, the IMF’s managing director, said last week: “Our new growth projections will include notable markdowns, but not recession. We will also see markups to the inflation forecasts for some countries.”
She acknowledged the world was undergoing a “reboot of the global trading system,” comparing trade tensions to “a pot that was bubbling for a long time and is now boiling over”.
She went on: “To a large extent, what we see is the result of an erosion of trust – trust in the international system, and trust between countries.”
IMF managing director Kristalina Georgieva. Pic: Reuters
Don’t poke the bear
It was a carefully calibrated response. Georgieva did not lay the blame at the US’s door and stopped short of calling on the Trump administration to stop or water down its aggressive tariffs policy.
That might have been a choice. To the frustration of politicians past and present, the IMF does not usually shy away from making its opinions known.
Last year it warned Jeremy Hunt against cutting taxes, and back in 2022 it openly criticised the Liz Truss government’s plans, warning tax cuts would fuel inflation and inequality.
Taking such a candid approach with Trump invites risks. His administration is already weighing up whether to withdraw from global institutions, including the IMF and the World Bank.
The US is the largest shareholder in both, and its departure could be devastating for two organisations that have been pillars of the world economic order since the end of the Second World War.
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Here in the UK, Andrew Bailey has already raised concerns about the prospect of global fragmentation.
It is “very important that we don’t have a fragmentation of the world economy,” the Bank of England’s governor said.
“A big part of that is that we have support and engagement in the multilateral institutions, institutions like the IMF, the World Bank, that support the operation of the world economy. That’s really important.”
The Trump administration might take a different view when its review of intergovernmental organisations is complete.
That is the main tension running through this year’s spring meetings.
How much the IMF will say and how much we will have to read between the lines, remains to be seen.
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