Looks Like The Fed’s Treading Carefully

Looks Like The Fed’s Treading Carefully

11 months ago2 mins

The Federal Reserve (the Fed) nudged rates up by 0.25 percentage points on Wednesday.

What does this mean?

The Fed usually does its best to signpost coming decisions – so by the time it announces any changes to rates, the market’s normally already quizzing its chairman about his next moves. But with three bank failures over the past few weeks, some have pinned the blame on the Fed's fastest-ever rate-hiking schedule – and that meant there was an unusual amount of uncertainty leading up to Wednesday's announcement.

There were calls from some quarters for the Fed to pause hikes, sit back, and watch how the economy would fare. But only a week or so ago, it was an odds-on bet the Fed would jack rates up by 0.5 percentage points. In the end, then, the central bank compromised, with a smaller rate increase and an acknowledgment that bank failures could impact folk’s ability to borrow. And that admission might mean this rate rise is its last.

Federal funds rate

Why should I care?

For markets: Move fast and (try not to) break things.

The fastest rate-hiking cycle in the Fed’s history was bound to leave some collateral damage. After all, we’re not talking chaos theory here: interest rates and banks are closely intertwined. But the Fed could still be vindicated: if a few smallish bank failures are the price the US pays to tame inflation – and if any incoming recession’s mild – then the central bank could yet emerge as a hero.

The bigger picture: Data dependent.

The Fed’s committed to acting in accordance with the numbers – but the economic figures have been all over the place lately, and that makes depending on the readouts pretty risky. Just look at the UK, where inflation’s staged a sudden and unexpected resurgence. So if the data keeps hopping around, maybe it’s time for the Fed to rethink its dependency on it – and start being a bit more forward-thinking.

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