The Federal Reserve on Wednesday raised interest rates by a quarter of a percentage point, but indicated it was on the verge of pausing further increases in borrowing costs amid recent turmoil in financial markets spurred by the collapse of two U.S. banks.The Fed decided that it could indeed walk and chew gum at the same time, pressing on with a quarter point rate hike to quell inflation, and obviously relying on other interventions to address concerns over financial system stability.
That message is echoed in the new Summary of Economic Projections, with the end-2023 rate projection unchanged at 5.1%, despite the projections for core PCE inflation being nudged up to 3.6% for end-2023 and 2.6% for end-2024.
While central bankers reassured the public that the US banking system is ‘sound and resilient’, they acknowledged that the recent turmoil would result in ‘tighter credit conditions’. The infamous dot plot left the terminal rate forecast of 5.1% unchanged. That said, the accompanying communique didn’t have much conviction regarding that projection. Policymakers now say that ‘additional policy firming may be appropriate, whereas previously they were sure that ongoing rate increases would be necessary.
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