Monetary Policy | Weekly Extract May 8

The Federal Reserve on Wednesday raised interest rates by 0.25% and hinted at a possible pause in June, but emphasized that choices regarding monetary policy will be based primarily on new data. The Federal Open Market Committee (FOMC) raised its benchmark rate from 4.75% to 5% to a range of 5% to 5.25%.

In contrast to its earlier language in March, which stated that Fed members anticipated that "some additional policy firming may be appropriate," the FOMC's May policy statement stated that future policy decisions would "take into account the cumulative tightening of monetary policy" and incoming data, suggesting that a pause in the hike is possible by June.

Changing the language in the policy statement represented a "significant change," according to Fed Chairman Jerome Powell, because "we were no longer saying that we anticipate [some additional policy firming]." Powell indicated a shift to a data-dependent stance by saying that future monetary policy decisions "will be driven by the incoming data meeting."

The fight against inflation continues

As the Fed struggles with high inflation, the most recent rate hike not only pushed the Fed's benchmark rate to the highest level expected in March, but also to its highest level in 16 years. Many are concerned about the upside potential that a robust labor market poses for inflation, especially core ex-housing inflation, which accounts for the majority of price pressures, even though inflation has shown signs of slowing.

The Fed's preferred inflation gauge, core PCE, which excludes volatile food and energy prices, showed a slowdown to 4.6% in March. But the FOMC reiterated that "inflation remains elevated" and that figure is still significantly higher than the Fed's 2% target. However, the Fed has persisted in stating that it will take time for its monetary policy actions to slow the economy and reduce inflation.