US Federal Reserve Raises Interest Rates a Quarter-Point Amid Banking Turmoil – Facing the greatest banking crisis since 2008 and the highest inflation rate in a decade, the Federal Reserve decided to continue combating price increases by announcing yet another interest rate increase.
The US central bank stated on Wednesday that its benchmark interest rate would increase by another quarter of a percentage point to a range of 4.75 to 5 percent, marking the ninth consecutive rate increase and the highest rate since 2007. Prior to a year ago, interest rates were near zero.
The most recent increase was less than the half-point increase that some had anticipated before to a string of bank failures that rattled global markets. The Fed said in a statement that the effects of the banking crisis were uncertain, while inflation remained elevated.
“The US banking system is sound and resilient. Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring and inflation. The extent of these effects is uncertain. The committee remains highly attentive to inflation risks,” the Fed said.
The failure of Silicon Valley Bank (SVB) earlier this month has been partially attributed on the Federal Reserve’s recent rate adjustments. As interest rates soared, SVB pushed deposits into long-term securities whose value declined. Those losses spooked depositors and led to a run on the bank.
Jerome Powell, the chairman of the Federal Reserve, has repeatedly stated that containing inflation is the central bank’s top objective. Prices were 6% higher in February than they were in February of the previous year, which was significantly lower than the 9.1% annual rate of inflation reported in June of last year but still far above the Fed’s target of 2%.
Before SVB’s collapse Powell told a Senate banking committee: “Although inflation has been moderating in recent months, the process of getting inflation back down to 2% has a long way to go and is likely to be bumpy.” Following Powell’s testimony, analysts speculated that the Fed could boost interest rates by an additional 0.5 percentage points at its March meeting. Yet the banking crisis threw off these calculations.
Concerned depositors withdrew funds from New York’s Signature Bank in the wake of SVB’s failure, causing a similar crisis. Last weekend, Swiss authorities facilitated the sale of Credit Suisse to larger competitor UBS. Wall Street’s largest banks were forced to prop up First Republic, a second mid-sized US bank whose share price has plummeted as depositors flee.
The Fed’s latest statement did hint that its rapid series of rate rises may be drawing to a close. Officials dropped a phrase used in their previous eight statements that said the committee anticipated “ongoing increases” in rates would be appropriate and replaced it with: “The committee anticipates that some additional policy firming may be appropriate.”