Because the interest rate decision was made against the background of the current banking crisis, a weakening economy and fears of a recession. This could persuade the Fed officials not to raise the key interest rate further at their next meeting on June 13th and 14th.
“No decision was made today about a pause,” Fed Chair Jerome Powell said at a press conference. Rate step decisions would be made “on a session-by-meeting basis, based on the totality of the data coming in.” The central bank said it would take into account the effects of previous rate hikes as well as “economic and financial developments” when making future interest rate decisions.
The Fed has been on a tough monetary policy stance for more than a year given the sharp rise in consumer prices in the US. The inflation rate hit a 40-year high of 9.1 percent last summer. In the meantime, the inflation rate has fallen to five percent – but it is still well above the two percent target of the Fed.
At the same time, there are a number of other problems. The bankruptcy of California’s First Republic Bank, which was placed under state control on Monday and sold to the major bank JPMorgan Chase, has caused new unrest. It was the second largest commercial bank failure in US history. The collapse of the Silicon Valley Bank (SVP) had already caused considerable turbulence in the banking sector and on the stock exchanges in March. The problems of the banks are due, among other things, to the sharp increases in key interest rates.
In any case, US economic growth has stalled. In the first quarter of the year, growth in the world’s largest economy fell to 0.3 percent. Annualized, i.e. extrapolated for the year as a whole, gross domestic product rose by 1.1 percent in the period. Analysts assume that the USA could slip into a slight recession.
In addition, the dispute between US President Joe Biden and the opposition Republicans over raising or suspending the debt ceiling is causing massive unease. US Treasury Secretary Janet Yellen warned on Monday that the US was threatened with insolvency by early June. If Congress does not raise or suspend the debt ceiling in the coming weeks, the administration will be unable to meet all of its commitments “by early June, possibly as early as June 1.”