(NewsNation) — The Federal Reserve raised its key interest rate by a quarter-point Wednesday amid turmoil in the banking sector and slowing but still-high inflation.
The decision raises the Fed’s benchmark rate to roughly 5.1% and marks its 10th-straight interest rate hike. It also comes as two competing economic trends could complicate future rate decisions.
To that end, the economy is likely to face further headwinds from tighter credit conditions, Federal Reserve Chair Jerome Powell said.
He attributed those conditions to the strains that emerged in the banking sector in March. It’s unclear to what extent economic activity, hiring and inflation will be impacted, Powell said.
Turmoil in the banking sector and political battles over the government’s borrowing limit could weaken the economy if banks restrict lending and financial markets tumble on fears of a default on the nation’s debt. Such anxieties would argue against further rate hikes, at least for now.
At the same time, inflation, while slowing, is persisting at a level far above the central bank’s 2% target rate.
The Fed’s rate increases since March 2022 have more than doubled mortgage rates, elevated the costs of auto loans, credit card borrowing and business loans and heightened the risk of a recession. Home sales have plunged as a result.
Across all items, year-over-year inflation has slowed, hitting 5% last month. That’s down from 9.1% in June, but still well above the 2% target.
“We’re going to need to stay at this for a while,” Powell said.
Recent data suggests retailers are already preparing for an economic slowdown. Last quarter saw a sharp reduction in business inventories, which subtracted roughly 2.3 percentage points from the economy’s overall growth.
New data released Friday shows growth in consumer spending flatlined last month and has been decreasing since the beginning of the year.
Many economists expect a recession sometime this year, though the severity and duration of that downturn remain unclear.
The Associated Press contributed to this report.