UPDATED: 03 MAY 2023 03:54 PM EST
The Federal Reserve raised interest rates Wednesday for what could be the last time this year, a major milestone in the fight against inflation.
Following two days of meetings this week, central bank policymakers didn't close the door on raising borrowing costs from their highest level since 2006 but suggested they're now taking a wait-and-see approach.
Price spikes have showed steady signs of cooling, and Fed officials hope that they have now increased rates enough to continue the momentum — particularly in light of banking turmoil that's expected to further slow the economy.
The central bank's meetings drew an unusual amount of attention both because the collapse of three banks has shaken financial markets and the White House is locked in a fight with GOP lawmakers over raising the U.S. government's debt limit that could have catastrophic results if it's not resolved.
"We shouldn’t even be talking about a world in which the U.S. doesn’t pay its bills," Fed Chair Jerome Powell said in his post-meeting press conference. "It just shouldn’t be a thing."
Fed policymakers are closely monitoring progress toward raising the ceiling on the government's ability to borrow. Powell said that debate was discussed as a risk to the economic outlook but wasn’t important to the rate decision.
“It is essential that the debt ceiling be raised in a timely way so that the U.S. government can pay all of its bills when they're due,” the central bank chief said. “No one should assume the Fed can protect the economy from the potential short- and long-term effects of a failure to pay our bills on time.”
If Congress can't come to a deal and Treasury is unable to make payments on time, that could lead to a sharp jump in interest costs, both for the federal government and for borrowers across the globe; Treasury securities are the backbone of all other debt markets.
Powell also said conditions in the banking sector have improved since March, when Silicon Valley Bank and Signature Bank failed. Another regional lender, First Republic, was seized by the government last weekend and sold to JPMorgan Chase, after limping along for weeks following SVB's collapse. Shares of other similar institutions remain under pressure.
If no more rate hikes are ahead, the question then becomes how long the central bank will hold borrowing costs at punishingly high levels and how well the job market will hold up.
Fed policymakers have projected that the unemployment rate could rise a percentage point this year — which could cost more than a million jobs — though for now, it remains near modern-era lows at 3.5 percent.
Staff economists at the Fed are predicting a mild recession later this year, although they expect the economy to begin recovering by next year, timing that could prove crucial for President Joe Biden as he seeks a second term in the White House.
But if inflation stays stubbornly high, central bank officials might slam the brakes even harder on growth, causing a sharp jump in joblessness and damaging Biden's hopes for reelection.
Powell said he didn't share the staff economists' view. "That’s not my own most likely case, which is really that the economy will continue to grow at a modest rate this year," he said, adding that if there is a downturn, his hope is that it will be mild.
The Fed's policy rate now sits between 5 percent and 5.25 percent after Wednesday’s quarter-point increase.
