Despite worries that rising borrowing costs would exacerbate the banking system’s turbulence, the Federal Reserve continued its year-long battle against high inflation on Wednesday by hiking its primary interest rate by a quarter point.
In a written statement made public following its two-day meeting, the Fed said that “the U.S. financial system is robust and resilient.”
The Fed issued a warning at the same time, stating that the financial turmoil brought on by the failure of two significant banks “is expected to result in tighter lending conditions” and “impact on economic activity, hiring, and inflation.”
The central bank also gave the impression that it was about to wrap up its aggressive program of rate increases.
It removed language from a statement suggesting it would raise rates at subsequent sessions.
There is now a weaker commitment to further increases in the report, which reads, “some more policy firming may be warranted.”
However, according to a series of quarterly economic estimates, Fed officials expect to increase their benchmark interest rate just once more, from its new level of around 4.9% to 5.1% on Wednesday.
They predicted the same peak level back in December.
The most recent rate increase indicates that Chair Jerome Powell is confident in the Fed’s ability to manage a dual challenge: lowering the country’s still-high inflation through higher loan rates while also calming the financial turmoil in the banking industry through emergency lending programs and the Biden administration’s decision to cover uninsured deposits at two failed U.S. banks.
The Fed’s move to hint that the rate-hike cycle is nearing an end may also calm the financial markets as they continue to process the fallout from the U.S. banking crisis and the weekend purchase of Credit Suisse by its bigger rival.
The short-term benchmark rate set by the Fed has now risen to its highest point in 16 years. Many loans, including credit card debt, business borrowing, mortgages, and vehicle loans, will probably incur increased fees due to the new level.
The likelihood of a recession has also increased due to the Fed’s ongoing rate hikes.
During a two-day policy meeting, the Fed’s most recent decision demonstrated a sudden change. Powell had already disclosed to a Senate panel earlier this month that the Fed was considering lifting its rate by a significant half-point.
At that time, consumer spending and hiring improved more than forecast, and inflation figures were updated upward.
The Fed’s statement had some wording that suggested the battle against inflation was still far from over. It deleted the term “inflation has eased somewhat,” which it had included in its announcement in February, and stated that hiring is “continuing at a healthy pace” while noting that “inflation remains elevated.”
The Fed’s decision to impose a lower rate boost on Wednesday was undoubtedly influenced by the problems that unexpectedly emerged in the banking sector two weeks ago.
Several analysts have warned that even a slight increase of a quarter point in the Fed’s benchmark rate, on top of its prior increases, might endanger weaker banks, whose uneasy clients might decide to withdraw sizeable deposits.
Indirectly, increased rates caused the value of the Treasurys and other bonds owned by Silicon Valley Bank and Signature Bank to plummet.
The banks had to sell the bonds at a loss to compensate the depositors due to the large-scale withdrawal of funds by worried depositors. They were unable to gather sufficient funds to do so.
With the collapse of the two banks, the giant rival UBS acquired the Swiss bank Credit Suisse last weekend.
First Republic, a different failing bank, has gotten sizable deposits from its rivals as a show of solidarity, even though its stock price fell on Monday before stabilizing.