Fed Reserve Chair Jerome Powell addressed the country Wednesday afternoon—announcing that interest-rate hikes were pausing.
- Powell announced that the Federal Reserve has decided to hold current interest rates at a range of 5% to 5.25%.
- The Fed judged it prudent to hold steady and process the economy’s reaction but will take the next few months of developments into account for future planning.
- Powell says that the full effects of monetary tightening have not yet been felt, and that additional hikes later this year are still possible.
- The news comes after Tuesday’s announcement that the Consumer Price Index dropped to 4% in May, the lowest it has been in two years.
- Powell predicts a 2023 GDP growth of 1% and 4.1% unemployment by the end of the year.
Why It’s Important
Wall Street and the economy welcome the news that the Fed has taken its expected path of backing off intense interest rate hikes. As we previously reported, the Fed rapidly increased rates to 5% over the past 15 months, unintentionally facilitating three of the largest bank crashes in American history over the past four months due to its effects on bonds. With the economy showing signs of resilience and inflation continuing to drop, the Fed made the decision to free up the economy—at least for a few months.
The Fed has been forthcoming since last year that there would be severe consequences for its actions. High interest rates will reduce inflation gradually over time because of higher unemployment and a recessionary economy. Powell already announced the Fed’s projections for increased unemployment and declining GDP at Wednesday’s conference. He continues to defend money tightening as the best solution to meeting the Fed’s mandate.
“Inflation has moderated somewhat in the past year. Nonetheless, inflation pressures continue to run high and the process of getting inflation down has a long way to go,” says Powell.
“My colleagues and I remain squarely focused on maintaining our dual mandate to promote maximum employment and stable prices for the American people. We understand the hardship high inflation is causing, and we remain strongly committed to bringing inflation back down to our 2% goal. Price stability is the responsibility of the federal reserve; without it, the economy does work for anyone.”