WASHINGTON — Federal Reserve officials raised interest rates by a quarter-point on Wednesday as they tried to balance two conflicting problems: the risk that inflation could remain rapid and the threat that turmoil in the banking system could slow the economy drastically.
The Fed on Wednesday pushed interest rates to a range of 4.75 percent to 5 percent, and officials forecast one more rate increase in 2023 — though they hinted that even that is uncertain. In doing so, policymakers tried to signal that they remained focused on wrestling down price increases but were also paying attention to financial threats.
“In assessing the need for further hikes, we’ll be focused on incoming data and the evolving outlook, and in particular on our assessment of the actual and expected effects of credit tightening,” Jerome H. Powell, the Fed chair, suggested at his post-meeting news conference.
The Fed’s statement said that some additional rate moves “may be” warranted, and Mr. Powell emphasized that “may” was crucial: Officials do not know that yet.
His comments underlined that the outlook for whether rates would rise further — and, if so, by how much — had been made uncertain by turmoil in the banking industry that could make loans harder to come by, slowing the economy.
Officials forecast that next year they would lower rates more slowly than they had anticipated, so that rates linger at 4.3 percent by the end of 2024, up from 4.1 percent. That suggested that the fight for stable inflation could be a longer and more gradual one than many had expected even a few months ago, though the outlook is complicated by the bank turmoil.
The forecasts and Mr. Powell’s remarks together underlined that his central bank is confronting a complicated moment — and trying to buy itself the time to decide how to react.
The Fed has raised interest rates at the fastest pace since the 1980s over the past year to try to cool a hot economy. Yet inflation has been surprisingly stubborn, and the job market remains strong. Those facts would likely have called for a more aggressive Fed response.
But high-profile bank collapses in recent weeks have underscored the risk that rapid Fed rate moves could stoke financial instability. Silicon Valley Bank, which failed on March 10, did so partly because it had amassed big losses on its portfolio of securities as interest rates climbed. And even more critically, the bank problems threaten to weigh on lending and spending, which ramps up the risk of a recession.
“The bottom line is: Credit conditions are going to tighten, and the Fed is acknowledging that,” said Diane Swonk, the chief economist at KPMG. The Fed “would like a slow cooling,” she added. “They just don’t want a deep freeze. And this increases the chances that the economy falls through the ice.”
Stocks, which initially jumped after the Fed’s decision was announced, fell sharply on Wednesday, finishing the day down 1.65 percent as investors digested the Fed’s interest rate move and comments by Janet Yellen, the Treasury secretary, suggesting that the government was not looking into a plan to extend broad protection for uninsured deposits.
The continuing jitters about the banking system come at a time when the economy has otherwise appeared strong — in spite of the Fed’s policy adjustments.
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 had retained so much momentum. Policymakers had hinted that they might revise up their forecasts for how much interest rates would rise in 2023.
“As of a couple of weeks ago, it looked like we’d need to raise rates — over the course of the year — more than we’d expected,” Mr. Powell acknowledged on Wednesday.
But the Fed chair explained that the bank problems had changed the outlook. By making it harder for consumers to access credit to buy houses or cars, or make other big purchases, the issues could weigh on demand, allowing the Fed to adjust interest rates less drastically.
“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’s policy committee said in its post-meeting statement. “The extent of these effects is uncertain.”
Economists at Goldman Sachs estimate that the effect could be equivalent to the slowdown prompted by one or two Fed rate increases. Mr. Powell seemed to suggest during his news conference that his estimate — while far from clear — was in that ballpark.
“You can think of it as being the equivalent of a rate hike, or perhaps more than that,” he said. “Of course, it’s not possible to make that assessment today with any precision whatsoever.”
But even with a bank-induced hit to the economy, the process of restoring stable inflation could take time.
Policymakers expected rapid price increases to be a more lasting problem, based on their fresh economic estimates. Officials thought inflation would finish 2023 at 3.3 percent, up from 3.1 percent in their December projections. That inflation measure was 5.4 percent in January.
Central bankers aim for 2 percent inflation on average over time. While price increases have been slowing from very elevated levels last year — the Fed’s preferred inflation index peaked at about 7 percent last summer — that progress has not been as steady as many hoped.
Continued price increases are weighing on family budgets, and there is a risk that a long period of quick inflation could make price increases a more permanent feature of the American economy.
That is what central bankers are trying to avoid. By lifting rates quickly over the past year, they have hoped to cool growth and bring inflation under control promptly. While brisk monetary policy adjustments increase the risk of financial turmoil and other problems, central bankers have worried that inflation will be harder and more painful to stamp out if it becomes entrenched in daily household and business behavior.
Once people are used to asking for big pay raises to cover climbing costs, and companies are used to making regular price increases, it could take a bigger economic downturn to rewire those habits and change the course of price increases.
“We have to bring inflation down to 2 percent,” Mr. Powell said. “The costs of failing are much higher.”
A critical question is whether the Fed will be able to slow the economy enough to cool inflation without a recession. Mr. Powell suggested that he still thought such a “soft landing” was possible — though he acknowledged that the recent banking upheaval has not helped.
“I think that pathway still exists,” Mr. Powell said. “We’re certainly trying to find it.”
Wall Street analysts have pointed out that the risks are greater in a world with financial turmoil, given that problems in the banking sector can easily spill over to hit Main Street.
“You have the trigger that can make it into a deeper recession — can make it into a hard landing,” said Priya Misra, the head of global rates strategy at TD Securities.
