Fed raises benchmark rate despite bank turmoil
The Federal Reserve raised interest rates by a quarter of a percentage point on Wednesday, moving forward with its fight against high inflation after taking dramatic steps to contain a banking crisis.
Less than two weeks after the collapse of Silicon Valley Bank and Signature Bank jarred the nation’s financial stability, Federal Reserve Chair Jerome H. Powell said the banking system had stabilized and that officials were confident there would not be more bank runs. The Fed has turned to finding out what caused such a significant failure. But Powell said the Fed’s efforts to slow the economy continue and stress in the financial markets might even help that effort.
“You can think of it as being the equivalent of a rate hike or perhaps more than that. Of course, it’s not possible to make that assessment today with any precision whatsoever,” Powell said.
The central bank is also facing questions about its regulatory oversight of SVB as Washington tries to figure out whether the government could have prevented the turmoil in the banking sector. Powell said as the Fed tried to understand “how did this happen,” focus shifted to “what are the right policies to put in place, so it doesn’t happen again.” Management at
SVB “failed badly,” Powell said, even while regulators were aware of problems and tried to intervene.
The Fed has begun an internal investigation, and Powell said he would “welcome” an outside investigation. But it remains to be seen whether or how the Fed will change its regulations to prevent a similar shock. Pressure is mounting on Capitol Hill for the central bank to explain how its policies made it possible for
SVB to fail, threaten the broader economy and necessitate emergency action.
“What went wrong here? How did this happen?” Powell said. “We will find that and then make an assessment of what are the right policies to put in place so that it doesn’t happen again.”
Before SVB’s meltdown, Powell had warned that the economic data was coming in hotter than expected. The job market was white hot, and inflation wasn’t falling at a rapid clip. That put the Fed on track for a slew of rate hikes in 2023.
But the economic picture quickly changed, and financial conditions tightened as the banking system took a hit. Powell said the result was equivalent to a rate hike “or perhaps more than that.” Policymakers considered pausing rate hikes on Wednesday but decided to move forward with a quarter-point hike as they prepare to stop sometime soon.
In a fresh crop of economic projections, officials penciled in one more quarter-point rate increase this year, though future moves depend heavily on how the economy behaves. Officials otherwise made small tweaks to their previous estimates from December. They now expect the unemployment rate to end the year at 4.5% (down from 4.6% the last time the bank made projections) and that the economy will grow by 0.4% this year (down from 0.5% they projected in December). Inflation will remain above normal levels through the end of 2023.
Financial markets expected the move, which brings the Fed’s base policy rate to between 4.75 and 5%.
Powell said he still saw a path to what’s known as a “soft landing” in which policymakers manage to bring down inflation without causing a recession.