Fed raises interest rate to 16-year record despite US banking crisis
THE US Federal Reserve raised interest rates to the highest level since 2007 yesterday even as chairman Jerome Powell warned the recent turmoil in the banking sector would hit jobs and growth.
The central bank lifted the Federal Funds rate by 0.25 percentage points to a range of 5pc to 5.25pc, extending to the Fed’s most aggressive hiking cycle since the 1980s.
The decision to keep raising rates came despite weeks of turmoil in financial markets that has seen three US banks collapse in the past two months.
This included First Republic, which was sold to JP Morgan last weekend after customers withdrew $100bn (£80bn) from the regional lender.
Mr Powell said the deal was an “important step in drawing a line under that period of severe stress” and insisted the broader banking industry remained “sound and resilient”.
However, he warned the turbulence would have significant economic costs.
“Strains that emerged in the banking sector” in the wake of Silicon Valley Bank’s collapse in March have led to “even tighter credit conditions for households and businesses” on top of the impact of multiple interest rate increases, Mr Powell said. “The extent of these effects remains uncertain.”
Concerns about the health of the US banking system also remained despite Mr Powell’s reassurances. The KBW banking index, which tracks the share price of 24 of America’s biggest national and regional lenders, fell a further 1pc yesterday. Fears over the health of the sector had sent shares in Californiabased Pacwest Bancorp down by almost a third earlier in the week.
Mr Powell said: “We will continue to monitor conditions in the [banking] sector. We’re committed to learning the right lessons from this episode. And we’ll work to prevent events like these from happening again.”
Mr Powell signalled the central bank would adopt a wait-and-see approach to further rate rises after confirming a tenth straight increase. Policymakers said the cumulative impact would “weigh on economic activity, hiring and inflation” amid growing fears of a damaging recession in the world’s biggest economy.
Investors are betting that the Fed will be forced to cut rates as soon as the autumn to support the economy, casting doubt on the Fed’s resolve to fight inflation. However, stock markets fell after Mr Powell said policymakers remained “squarely” focused on taming inflation and supporting jobs, insisting rate cuts would not be warranted based on its current economic projections.
He said the decision to raise interest rates again was prompted by a “very tight” jobs market.
Mr Powell criticised Republicans and Democrats for an impasse over the nation’s debt limit, warning that the Fed could not “protect the economy” from the potential fallout of a US debt default.
Joe Biden, the US president, is currently locked in a standoff with Republicans in Congress over how to raise the debt limit, which determines how much money the US government can borrow.
Economists have warned that failure to raise the so-called debt ceiling will roil global markets.
Mr Powell said: “We shouldn’t be talking about a world where the US doesn’t pay its bills.”
Treasury Secretary Janet Yellen, a former Fed chairman, has warned that the administration will not have enough cash to pay its debts as early as June 1 unless the political impasse is broken.
Fears of a sharp slowdown in the world’s biggest economy had pushed oil prices down almost 5pc to as low as $71.70 a barrel earlier yesterday.