US Federal Reserve votes to increase interest rates to 16-year high

The US Federal Reserve voted on Wednesday to raise interest rates to a 16-year high even as the banking crisis hobbles the economy.

The quarter-point increase in the Fed's benchmark interest rate was the 10th increase since March 2022, when interest rates were near zero and the Fed began a rapid campaign to fight inflation. The interest rate is now 5% to 5.25%.

Fed Chairman Jerome Powell has consistently argued that the central bank should prioritize reducing inflation, which has hit a 40-year high in the wake of the COVID-19 pandemic.

"Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring and inflation. The extent of these effects remain uncertain. The Committee remains highly mindful of inflation risks," the Fed said.

The statement indicated that the Fed's rate hikes - the sharpest in 40 years - could be nearing an end. The statement may be appropriate to cut off a phrase suggesting additional increases were included in its previous rate hike announcement.

At a press conference, Powell said: "There is a feeling that, you know, we are much closer to the end of this than the beginning." But he warned that "future policy actions will depend on how events unfold".

In March, the annual inflation rate was 5%, down from its peak of 9.1% in June and its lowest rate since 2021. Inflation has declined steadily over the past few months, but remains well above the Fed's target rate of 2%.

Although overall inflation eased in the past few months, most of the reduction was seen in the volatile energy sector, which saw prices jump after Russia's invasion of Ukraine a year ago.

But there are signs that the economy is starting to cool down. Consumer spending has flattened and US manufacturing fell to a nearly three-year low in March after years of growth from the pandemic.

It's the fourth quarter-point increase, one of four smaller increases since the Fed made four consecutive three-quarter-point increases over the summer and slashed interest rates to 40-year highs.