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The Fed raises interest rates again in what could be its final attack on inflation

Federal Reserve Chair Jerome Powell speaks during a news conference at the Federal Reserve in Washington, D.C, on March 22, 2023.
Olivier Douliery
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AFP via Getty Images
Federal Reserve Chair Jerome Powell speaks during a news conference at the Federal Reserve in Washington, D.C, on March 22, 2023.

Updated May 3, 2023 at 5:44 PM ET

The Federal Reserve raised interest rates by another quarter percentage point Wednesday, extending its 14-month crackdown on stubborn inflation.

With signs of a softening job market and slower economic growth, this could be the central bank's last rate hike for a while, especially as turmoil in the banking sector raises new uncertainties.

The Fed hinted as much in a statement, dropping a line it used previously about the likely need for additional rate increases.

"I think we've moved a long way fairly quickly," Fed Chair Jerome Powell told reporters after the Fed announced its decision. "I think we can afford to look at the data and make a careful assessment."

The Fed has raised borrowing costs at ten consecutive meetings, pushing its benchmark rate to between 5 and 5.25%. On average, that's where Fed policymakers thought rates would be at the end of this year, when they last offered a forecast in March.

Whileinflation has cooled since last summer, it's still more than twice as high as the central bank's target of 2%.

Prices in March were up 4.2% from a year ago, according to the Fed's preferred inflation measure. The "core" inflation rate, which excludes volatile food and energy prices, was 4.6%.

Has the Fed done enough?

The Fed's efforts to curb inflation by slowing the economy with the most aggressive series of rate hikes since the 1980s are beginning to show results.

Construction and manufacturing — which are particularly sensitive to borrowing costs — have downshifted. And after a strong January, consumer spending slowed sharply in February and March.

The job market also appears to be losing some steam, although unemployment is still hovering near a 50-year low.

Job gains in Marchwere the lowest in more than two years. And while layoffs are still rare by historical standards, they have been inching up.

Some observers warn that any additional rate hikes by the Fed would put more jobs at risk, without necessarily doing much to control prices.

"It becomes less and less warranted to continue pursuing policies that theoretically bring down inflation but at expense of the labor market," said Lindsay Owens, executive director of the Groundwork Collaborative, a progressive think tank in Washington, D.C. "It's not the case that we have to keep hammering away."

A person walks past a First Republic bank branch in Manhattan, New York City, on April 24, 2023. The lender was sold to JPMorgan Chase on Monday after a brief government takeover, becoming the third bank to fail this year.
Spencer Platt / Getty Images
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Getty Images
A person walks past a First Republic bank branch in Manhattan, New York City, on April 24, 2023. The lender was sold to JPMorgan Chase on Monday after a brief government takeover, becoming the third bank to fail this year.

Banking turmoil complicates the Fed's job

Recent stress in the banking sector also factors in the Fed's calculation. Since the collapse of Silicon Valley Bank and Signature Bank in March, other lenders have grown more cautious about extending loans.

The resulting drop in lending weighs on economic growth, much like rising interest rates, but its effects are even harder to calibrate and predict.

The Fed itself bears some responsibility for the banking turmoil, which has yet to abate with the collapse of First Republic Bank over the weekend.

The Fed's aggressive rate hikes have reduced the value of some bank investments.

And a scathing report from the Fed last week found its own supervisors failed to properly monitor Silicon Valley Bank, allowing its problems to fester until it was too late.

Michael Barr, the Fed's vice chair for supervision, blames a policy choice in 2019 that exempted all but the biggest banks from strict scrutiny, as well as a shift in culture at the Fed to favor a lighter touch in bank regulation.

Powell endorsed Barr's findings and his call for stronger bank regulation.

"I've been chair of the board for five-plus years now. And I fully recognize that we made some mistakes," Powell said. "We're committed to learning the right lessons from this episode and will work to prevent events like these from happening again."

Copyright 2023 NPR. To see more, visit https://www.npr.org.

Scott Horsley is NPR's Chief Economics Correspondent. He reports on ups and downs in the national economy as well as fault lines between booming and busting communities.