Will Recent Fed Moves Be Enough To Stave Off A Recession?
The Federal Reserve made an expected move with its announcement Wednesday of a small interest rate hike. The 25 basis point increase may be the final such increase as the Fed attempts to tamp down persistent inflation while also preventing a recession.
The increase of interest rates by 0.25% means that the Fed Funds Rate is now equivalent to its height in 2006 and 2007 prior to the 2008 economic crisis.
Tomorrow the Fed will hike to 5.25%. That was the final rate during the 2004/6 tightening cycle too. pic.twitter.com/RAm5AM95dA
— zerohedge (@zerohedge) May 2, 2023
The Federal Reserve has not fully telegraphed what its next move may be, but in an official statement, the central bank removed a reference to “additional policy firming.”
If the interest rates continue rising, the pressure that affected Silicon Valley Bank or First Republic may continue.
Furthermore, if the Fed undershot the interest rate increase, it is possible that the inflation that has harmed American wallets over the previous two years could continue. A further increase in interest rates runs the risk of a significant economic downturn.
Federal Reserve Chair Jerome Powell spoke after the rate increase was announced.
The chair said that the Fed believed that “inflation is going to come down not so quickly.” He added that if that occurs, “it would not be appropriate to cut rates and we won’t cut rates.”
Powell also believes that recent news of lower hiring rates nationwide could be a sign that the nation may avoid a recession.
“There are no promises in this, but it just seems to me that it’s possible that we can continue to have a cooling in the labor market labor market without the big increases in unemployment that have gone with many prior episodes,” Powell said.
The situation appears negative for many Americans. The collapse of First Republic Bank marked the third such collapse in the United States this year so far. It also represented the second-largest bank failure in the country’s history.
Furthermore, following the high-profile bank failures, economists have increased the odds that the country will fall into recession in the next twelve months. One recent estimate placed the odds of such a downturn at 65%, up from 60% in February.