Federal Reserve officials raised interest rates by a quarter-point on Wednesday as officials tried to balance two conflicting problems: the risk that inflation could remain rapid, and the threat that higher borrowing costs could fuel turmoil in the banking system.
The Fed’s release, which pushed interest rates to a range of 4.75 percent to 5 percent while forecasting one more rate increase in 2023, was one of the most closely watched in years as conflicting forces left investors and economists guessing at what central bankers would do.
Officials projected that they will raise interest rates to 5.1 percent in 2023, unchanged from their December estimate and implying just one more rate move this year. They still see rates coming down slightly in 2024, but less than they had previously.
Inflation has been surprisingly stubborn and the job market remains strong, trends that suggest the Fed may have more work to do when it comes to slowing down the economy and wrestling inflation back under control. But high-profile bank failures in recent weeks have underlined the risk that rapid Fed rate moves could stoke financial instability, and might themselves slow lending and spending in the economy and increase the risk of a recession.
The Fed nodded to both challenges in its post-meeting statement, declaring that officials remain attentive to price risks even as it warned that the tumult in the banking system could weigh on growth.
“Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring and inflation,” the Fed said in its statement. “The extent of these effects is uncertain.”
The Fed has been rapidly raising its policy interest rate since March 2022, making it more expensive to borrow money in hopes of cooling spending and eventually weighing down inflation. Officials made four straight three quarter-point rate increases last year before slowing to a half point in December and a quarter-point in early February. Just two weeks ago, many economists and investors thought central bankers might speed their rate moves back up at this meeting because incoming economic data have retained so much momentum — a reality that officials acknowledged in their statement Wednesday.
“Job gains have picked up in recent months and are running at a robust pace,” Fed policymakers said in their release, while cutting a previous line that said inflation had begun to moderate.
But the failure of Silicon Valley Bank on March 10 and Signature Bank on March 12 has sent shock waves through the financial system, causing trouble at other banks and prompting a sweeping response from federal regulators. Trouble in the banking sector could translate into fewer business loans and mortgages, as the Fed statement suggested.
Jerome H. Powell, the Fed chair, will deliver prepared remarks and take questions from the media at a 2:30 p.m. news conference to explain the decisions. Mr. Powell will need to strike a delicate balance: keeping up the fight against rapid price increases without seeming deaf to risks in the banking sector.
Yet how large that effect might be is unclear. Economists at Goldman Sachs estimate that the fallout could be equivalent to one or two Fed rate increases, while others see a much larger impact.
Before the bank blowups, the Fed’s estimate of the interest rate peak was expected to rise, so the stable figure underlined that the recent financial drama is weighing on policymakers’ minds and discouraging them from moving so quickly and drastically this year.
Officials also removed a line from their post-meeting statement that suggested they would make “ongoing” rate increases, which struck some analysts as consequential.
“Removing the ongoing increases opens the door for this potentially being the last hike,” said Priya Misra, head of global rates strategy at T.D. Securities, explaining that she thought the Fed’s gentler stance reflected the recent banking problems. “You have the trigger that can make it into a deeper recession — can make it into a hard landing.”
Yet policymakers expect rates to remain higher into 2024 than they had previously estimated. Officials now expect borrowing costs to be 4.3 percent at the end of next year, up from 4.1 percent previously, suggesting that the Fed will be weighing down the economy more gradually and for longer than it had previously expected.
That is likely a response to another reality: Policymakers now expect inflation to be a more stubborn problem than they had earlier anticipated. Officials think inflation will finish 2023 at 3.3 percent, up from 3.1 percent in their December projections. That inflation measure was 5.4 percent in January.
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