Interest rate reaches its highest level in 16 years

Get ready to pay more – AGAIN.

The Federal Reserve raised its key interest rate by a quarter-point to the highest level in 16 years to 5.25 percent. But there is a glimmer of hope in all this. The Fed also signaled that it may now pause the streak of 10 rate hikes that have made borrowing for consumers and businesses steadily more expensive.

In a statement after its latest policy meeting, the Fed said that while the banking system is “sound and resilient,” the upheaval in the financial system could slow borrowing, spending and growth. It reiterated that the impact of pullback in bank lending “remains uncertain.”

The Fed’s rate increases over the past 14 months 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.

Yet the Fed’s efforts have only partly succeeded in taming the worst inflation bout in four decades, and the surge in rates has contributed to the collapse of three large banks and turmoil in the banking industry. All three failed banks had bought long-term bonds that paid low rates and then rapidly lost value as the Fed sent rates higher.

The banking upheaval might have played a role in the Fed’s decision Wednesday to consider a pause. Chair Jerome Powell had said in March that a cutback in lending by banks, to shore up their finances, could act as the equivalent of a quarter-point rate hike in slowing the economy.

Fed economists have estimated that tighter credit resulting from the bank failures will contribute to a “mild recession” later this year, thereby raising the pressure on the central bank to suspend its rate hikes.