WASHINGTON—Federal Reserve officials signaled they might be done raising interest rates for now after approving another increase at their meeting that concluded Wednesday.
“People did talk about pausing, but not so much at this meeting,” Fed Chair Jerome Powell said at a news conference. “We feel like we’re getting closer or maybe even there.”
The unanimous decision marked the Fed’s 10th consecutive rate increase aimed at battling inflation and brings its benchmark federal-funds rate to a range between 5% and 5.25%, a 16-year high.
Stocks retreated after the decision. The Dow industrials were down 0.8%, or about 270 points. U.S. government bonds rallied slightly. The benchmark 10-year U.S. Treasury yield fell to 3.401%, from 3.438% Tuesday.
With the latest increase, the Fed has raised its benchmark federal-funds rate by a cumulative 5 percentage points from near zero in March 2022, the most rapid series of increases since the 1980s. The rate influences other rates throughout the economy, such as on mortgages, credit cards and business loans.
“I think that policy is tight,” Mr. Powell said. But he added, “we are prepared to do more if greater monetary policy restraint is warranted.”
Until now, officials have been looking for clear signs of a slowdown to justify ending rate increases. But Mr. Powell indicated that calculation could shift now, and officials would need to see signs of stronger-than-expected growth, hiring and inflation to continue raising rates. The Fed’s next meeting is June 13-14.
The Fed fights inflation by slowing the economy through lifting rates, which causes tighter financial conditions such as higher borrowing costs, lower stock prices and a stronger dollar. Banking stresses are expected to further tighten financial conditions, but the magnitude of any credit crunch is hard to predict and might not be apparent for months.
“We have a broad understanding of monetary policy. Credit tightening is a different thing,” Mr. Powell said.
Analysts said Mr. Powell’s comments suggested an important shift in what the Fed would monitor as it determines any further moves. “For the last 12 months, it has been all about inflation and the pace of employment growth,” said Blerina Uruci, chief U.S. economist at T. Rowe Price. “Now, perhaps, that is broadening. Banking-sector stress and credit conditions are going to be part of that calculation much more now.”
Some said the Fed would have been better off holding rates steady Wednesday to see how those strains slow the economy. “It’s not clear this move was necessary,” said Brian Sack, an economist and former senior executive at the New York Fed. “The arguments for the hike were very backward looking, and that’s just not the right approach when you have such important developments affecting the path of the economy going forward.”
Mr. Sack said he thought the Fed wouldn’t raise rates again this year.
Others said the increase was a reasonable way to balance the risks of sustained inflation pressures in a resilient economy. “It’s not an indefensible position, I don’t think. Is it one made a lot more difficult by the current backdrop? Yes,” said Michael de Pass, global head of linear rates trading at Citadel Securities.
Officials dropped a key phrase from their previous policy statement, in March, that said they anticipated some additional increases might be appropriate, and they replaced it with new language saying they would carefully monitor the economy and the effects of their rapid increases over the past year.
“That’s a meaningful change, that we’re no longer saying that we ‘anticipate’” additional increases, said Mr. Powell.
Officials considered skipping a rate hike in March after the failures of two regional lenders, Silicon Valley Bank and Signature Bank, raised worries about a bank-funding crisis. But they concluded that the stresses had calmed enough on the eve of their March 22 decision to move ahead with an increase.
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The sale of First Republic Bank to JPMorgan Chase by the Federal Deposit Insurance Corp., announced Monday, showed how those strains are still clouding the economic outlook.
Mr. Powell said conditions in the banking sector had broadly improved since March. “There were three large banks, really, from the very beginning that were at the heart of the stress that we saw,” he said. “Those have now all been resolved and all the depositors have been protected.”
Officials have signaled growing divergence over the policy outlook recently, with some urging greater caution about raising rates given the lagged effects of the banking stress and the Fed’s earlier increases. Others are more worried about stopping prematurely only to see economic activity and inflation remain strong.
In projections released after their March meeting, most Fed officials thought they would need one more quarter-point rate rise before moving to the sidelines. But many thought they might need at least two more increases.
At the March meeting, the Fed staff forecast a recession would start later this year due to the banking-sector turmoil. The staff hasn’t usually projected a recession before a downturn begins. Previously, the staff had judged a recession was roughly as likely to occur as not this year.
Mr. Powell said he didn’t share the staff’s view, but he didn’t dismiss the prospect of a recession. “It’s possible that we will have—what I hope would be—a mild recession,” he said.
Since officials met in March, the economy has shown only modest signs of cooling, including more muted consumer spending and factory activity. Job openings declined in February and March, and the share of private-sector workers voluntarily leaving their jobs has returned closer to prepandemic levels, suggesting the tight labor market has eased a bit.
Hiring remains robust. Employers added nearly 345,000 jobs a month on average in the first quarter.
Steady job growth and brisk wage gains could sustain higher inflation. The Fed’s preferred inflation gauge, the personal-consumption expenditures price index, rose 4.2% in March from a year earlier. That was down from the previous month’s 5.1% increase. Core prices, which exclude volatile food and energy prices, rose 4.6% in March, slowing from 5.1% in October. The Fed targets 2% inflation over time.
The housing market—one of the sectors hardest hit by Fed rate increases—has seen some signs of improvement, illustrating how difficult it has been so far for the Fed to slow economic activity.
Some congressional Democrats chided the Fed’s latest move. Rep. Brendan Boyle (D., Pa.), the top Democrat on the House Budget Committee, called the increase “imprudent.”
Many have faulted the Fed for being slow to remove stimulus after Congress approved more than $2 trillion in spending at the end of 2020 and in early 2021, when inflation first surged. But Sen. Elizabeth Warren (D., Mass.) said the Fed should have taken a more cautious approach to fighting inflation. “The problems we have that are driving prices higher are not all problems that you can fix by raising interest rates,” she said on CNBC. “You’ve got other tools you have to work with.”
The Fed and many investors have sometimes been at odds during the past nine months over how high rates might rise and how long rates will stay at those higher levels to ensure inflation declines. Investors have often anticipated a speedier drop in inflation and rates, in part because they expect rate increases to tip the economy into recession.
Those expectations have led long-term bond yields to decline, potentially making it harder for the Fed to restrain the economy with higher short-term rates.
Mr. Powell pushed back against expectations of rate cuts this year, but he acknowledged that investors expecting inflation to fall quickly could take that view. “We on the committee have a view that inflation is going to come down not so quickly. In that world, if that forecast is broadly right, it would not be appropriate to cut rates, and we won’t cut rates,” he said.
