The Federal Reserve is raising its key interest rate by 0.25 percentage point, underscoring central bankers’ commitment to fight inflation even as financial pressure on the nation’s banks rises.
The bank’s rate-setting body said on Wednesday that the central bank’s benchmark rate is rising to a range of 4.75% to 5%. Report. This is the highest level for the federal funds rate since 2006.
suddenlyon March 10 and Signature Bank of New York two days later sparked fears that worried depositors might rush to withdraw their money from other regional lenders, triggering a broader crisis.
Bank wobble leads Fed to pull back
As recently as two weeks ago, the Fed was set for a steep rate hike and was poised to raise them longer. But the startling deposit holdings at Silicon Valley Bank, the closing of two smaller banks and the takeover of two banks created panic in the financial system. Many economists and the central bank noted that fresh caution by banks following the turmoil could drag on the economy.
“Prior to recent events, we were clearly on track to continue the current rate hikes. In fact, a few weeks ago, it looked like we would have to raise rates later this year than we expected.” Federal Reserve Chairman Jerome Powell said at a press conference.
“Events of the past two weeks may result in some tightening of credit conditions for households and businesses, thereby weighing on demand in the labor market and inflation,” Powell added. “In principle, in reality, you could think it would be equal to or even more than a rate hike. Of course, that estimate can’t be made with any precision today,” he said.
Powell also sought to allay fears about the stability of the broader banking system.
“Our banking system is solid and resilient with strong capital and liquidity. We continue to closely monitor conditions in the banking system and are prepared to keep all our instruments safe and secure,” he said.
Both Silicon Valley Bank and Signature Bank were, presumably, weighed down by higher rates, whose rapid rise hurt the value of their holdings of Treasuries and mortgage-backed securities. As distressed depositors withdrew their money en masse, banks had to sell bonds at a loss to pay depositors.
Is a recession coming?
The central bank’s latest policy statement marks a shift from fighting inflation at all costs to a more delicate balance between trying to keep prices down while further eroding public confidence in banks and tightening credit to the detriment of the economy.
“A bleak rate hike from the Fed was delivered today as it tries to balance risks to price stability and fighting inflation,” Charlie Ripley, senior investment strategist at Alliance Investment Management, said in a note. “Not signaling a higher terminal rate should send a message to market participants that the economy may be weaker than recent economic data suggests.”
But with economic growth already slowing, even a small rate hike could push the U.S. into recession and push the unemployment rate higher, economists said.
“Before [banking] “We thought the economy was at high risk of recession this year, and as recent events hit confidence and could lead to significant further tightening of credit conditions, we are now more bullish on that view,” said Andrew Hunter, vice president of U.S. economics at Capital Economics, in a statement.[W]The crisis gives us more confidence in our view that the economy will soon fall into recession, and we doubt the Fed will cut rates again before too long.