ANOTHER JAY HIKE
Fed’s .25% rise despite shaky banking sector
The Federal Reserve hiked interest rates again Wednesday — a pivotal move that showed the central bank’s resolve to tackle inflation despite recent instability in the US banking sector.
In a hotly anticipated decision, the rate-making Federal Open Market Committee raised its benchmark rate by 0.25% — to a range of 4.75% to 5% — at the end of its policy meeting.
Fed Chair Jerome Powell told reporters that members of the FOMC “did consider” leaving interest rates unchanged due to concerns about the banking sector, but ultimately pushed ahead with a small hike as inflation still runs high.
The chairman noted that the decision was “supported by a very strong consensus.” The bank crisis is likely to result in a tightening in credit conditions that could have the same cooling effect on the economy as an interest rate hike, he added.
“Such a tightening in financial conditions would work in the same direction as rate tightening,” Powell said. “You can think of it as being the equivalent of a rate hike or perhaps more than that.”
The Fed chair said a “small number of banks” had experienced “serious difficulties,” but he downplayed further risks for the sector. Overall, the banking system has “strong capital and liquidity” and “deposit flows have stabilized,” according to Powell.
Powell noted the FOMC’s statement now says “some additional policy firming may be appropriate” — a softer stance indicating that the Fed may not need to implement more rate hikes.
US stocks initially rose after Powell’s press conference but then tumbled. The
Dow Jones Industrial Average was up as much as 200 points before plunging 530 points, or 1.6%. The Nasdaq and the S&P 500 were also down 1.6%.
The tough call by the Fed had been the subject of fierce debate since Silicon
Valley Bank and Signature Bank of New York collapsed in the largest US bank failures since the 2008 financial crisis.
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The increase marked the ninth consecutive interest rate hike for the Fed during a swift tightening of monetary policy over the past year. The Fed also hiked rates by a quarter of a percentage point at its meeting in February.
Powell and his colleagues were forced to consider the US banking sector crisis even with inflation running at 6% — well above the Fed’s 2% target.
Powell said Fed officials are working to assess what went wrong at SVB and what guardrails should be implemented to prevent similar collapses in the future.
“Silicon Valley Bank management failed badly,” Powell said. “They grew the bank very quickly, they exposed the bank to significant liquidity risk and interest-rate risk.”
The Fed also released updated “dot plot” projections showing that officials see benchmark interest rates topping out at 5.1% this year. Powell noted committee members currently do not expect to enact any rate cuts in 2023.