Washington –
The U.S. Federal Reserve (Fed) on Wednesday boosted inflation by raising its key rate by half a percentage point despite concerns that higher borrowing rates could exacerbate the turmoil that has dominated the banking system. extended a year-long battle with
“The U.S. banking system is healthy and resilient,” the Fed said in a statement after its latest policy meeting.
At the same time, the Fed warned that the financial turmoil stemming from the failures of two major banks “will likely lead to a tightening of credit conditions” and “will weigh on economic activity, employment and inflation.”
The central bank has also suggested that a string of aggressive rate hikes is likely coming to an end. In the statement it issued, it removed language that previously indicated it would continue to raise rates at upcoming meetings. The statement now says “additional policy enhancements may be appropriate”, undermining its commitment to future rate hikes.
And in a series of quarterly economic forecasts, Fed policymakers are forecasting just one more key rate hike. This is the same high they predicted for his December.
Recent rate hikes suggest Chairman Jerome Powell is confident the Fed can handle a dual challenge: banking sector disruptions through an emergency loan program and the Biden administration’s decision to cover uninsured deposits At the same time, rising loan rates helped to cool still-high inflation at two US banks that collapsed.
The Fed’s move to mark the end of its rate hike campaign comes as financial markets continue to digest the turmoil in US banks and the consequences of last weekend’s takeover of Swiss bank Credit Suisse’s bigger rival UBS. Because it is there, it may calm you down.
Central bank benchmark short-term interest rates are now at their highest level in 16 years. The new level could increase the cost of many loans, from mortgages and car purchases to credit cards and corporate loans. A series of Fed rate hikes have also increased the risk of recession.
Wednesday’s Fed policy decision reflects a sudden change. Earlier this month, Powell told his Senate panel that the Fed was considering rate hikes much higher than his 0.5 percentage point. At the time, employment and consumer spending were growing faster than expected, and inflation data had been revised upwards.
In its latest policy statement, the Fed included language indicating that the fight against inflation is still far from complete. Employment was “going at a strong pace,” he said, adding that “inflation is still rising.” Removed the phrase “inflation has eased somewhat” from the February statement.
The sudden troubles in the banking sector two weeks ago may have prompted the Fed to decide to raise the benchmark rate by a quarter of a percentage point instead of half a percentage point. Some economists say even a meager quarter-point rise in the Fed’s key rate, in addition to previous rate hikes, could put weak banks at risk, where nervous customers could withdraw large deposits. I warn you there is.
Both Silicon Valley Banks and Signature Banks have indirectly fallen as interest rates rise, causing the value of their holdings of Treasuries and other bonds to plummet. Worried depositors withdrew their money en masse, forcing banks to sell bonds at a loss to pay depositors. They were unable to raise enough cash to do so.
Credit Suisse was acquired by UBS after two banks went bankrupt. Already his other struggling bank, First Republic, took hefty deposits from competitors to show its support, even though its share price plunged before it stabilized on Monday.
Effectively, the Fed has decided to treat inflation and financial turmoil as two separate issues, managed simultaneously with separate tools. They are raising interest rates to combat inflation and increasing Fed lending to banks to calm financial turmoil.
The Federal Reserve, Federal Deposit Insurance Corporation, and Treasury have agreed to insure all Silicon Valley and Signature deposits, including accounts above the US$250,000 limit. The Fed also created a new lending program to allow banks access to cash to repay depositors as needed.
But economists warn that many small and medium-sized banks are likely to be wary of lending to save capital. Tighter bank credit could reduce corporate spending on new software, equipment and buildings. It may also make it harder for consumers to obtain auto and other loans.
Some economists fear that such a slowdown in lending will be enough to plunge the economy into recession. Wall Street traders are betting that a weakening economy will force the Fed to cut rates this summer.
The Fed may welcome slowing growth to help keep inflation in check. But few economists are sure of the impact if bank lending slows.
Other major central banks are also trying to keep high inflation in check without exacerbating the financial instability caused by the collapse of two US banks and the hasty sale of Credit Suisse to UBS. For example, the Bank of England is under pressure to approve his 11th consecutive rate hike on Thursday despite unrest surrounding the global banking system, with annual inflation reaching his 10.4%.
The European Central Bank also said Europe’s banking sector is resilient, raising its base rate by 0.5 percentage points last week to combat 8.5% inflation. At the same time, ECB President Christine Lagarde has moved to an open-ended stance on further rate hikes.
In the United States, the latest data still point to a strong economy and strong employment. Employers added 311,000 strong jobs in February, according to a government report. The unemployment rate he rose from 3.4% to 3.6%, largely reflecting the influx of new job seekers who were not immediately hired.
