USA TODAY International Edition
Bank turmoil doesn’t derail Fed
Reserve stays course with quarter- point increase
WASHINGTON – The Federal Reserve raised its key short- term interest rate by a quarter percentage point Wednesday, pushing ahead with its aggressive campaign to tame inflation despite financial turmoil following Silicon Valley Bank’s collapse.
But acknowledging the crisis will constrain bank lending and weaken the economy and inflation, Fed officials forecast just one more rate hike this year and even that move is uncertain.
The Fed is anticipating another quarter- point increase to a peak range of 5% to 5.25%, in line with its December estimate and lower than the level markets anticipated before SVB’s meltdown, according to the officials’ median estimate.
“You can think of ( the SVB crisis) as being the equivalent of a rate hike and perhaps more than that,” Fed Chair Jerome Powell said at a news conference.
He added that “it’s too soon to tell” how much the stricter bank lending will hobble the economy and tame inflation but said it could be more significant than expected and the Fed “may have less work to do.”
In a statement after a two- day meeting, the Fed acknowledged recent strains in the nation’s banks and said they will soften the economy but added the financial system is stable.
“The U. S. banking system is sound and resilient,” the Fed said. “Recent developments are likely to result in tighter credit conditions for households
and businesses and to weigh on economic activity, hiring and inflation. The extent of these effects is uncertain.”
Powell said the transfer of deposits from midsize banks to larger ones has moderated and no banks are displaying the troubles that plagued Silicon Valley Bank, calling it “an outlier.”
The central bank underscored that its priority remains tempering consumer price increases, adding, “The ( Fed’s policymaking committee) remains highly attentive to inflation risks.”
The Fed also said “additional policy firming may be appropriate” to lower inflation to the Fed’s 2% target, signaling that it’s close to winding down the hiking cycle and even the remaining quarter- point move it anticipates isn’t definite. It previously has said “ongoing increases … will be appropriate.”
Powell, however, told reporters the Fed had to act Wednesday to bolster the public’s confidence that the Fed will subdue inflation that reached a 40- year high of 9.1% last June.
The Fed’s latest move brings the federal funds rate to a range of 4.75% to 5%. It’s expected to further slow economic activity as it drives up rates for credit cards, adjustable- rate mortgages and other loans. But Americans, especially seniors, are finally benefiting from higher bank savings yields after years of paltry returns.
Amid the aftershocks of bank runs that felled SVB and another bank, the Fed faced a wrenching decision over whether to continue to back up its inflation- fighting rhetoric or take a more cautious path and pause after 41⁄ points of rate increases the past year. Those rate bumps at eight straight meetings marked the most rapid flurry since the early 1980s and contributed to the crisis, raising the risk that another increase could deepen banks’ troubles.
With banking stresses easing in recent days, most economists reckoned officials would lift the fed funds rate by a quarter point. That would give a nod to the banking troubles by hiking less than the half point markets predicted before the crisis. But it would keep the Fed on track to curb inflation that has surged again so far this year after easing in late 2022. Job growth, pay increases and consumer spending also have accelerated after downshifting last year, compounding inflation concerns.
On Wednesday, the Fed said it expects the economy to grow 0.4% in 2023, slightly less than the 0.5% it projected in December, according to policymakers’ median estimate. Officials forecast just 1.2% growth in 2024, below the 1.6% they previously projected.
Many economists are less sanguine and expect the Fed’s rate increases, along with the banking troubles, to spark a recession this year.
Fed officials predict the 3.6% unemployment rate will rise to 4.5% by the end of the year, a bit below the 4.6% they previously forecast.
The Fed’s preferred measure of annual inflation is now expected to decline from 5.4% in January to 3.3% by year- end, above earlier estimates of 3.1%. Inflation is projected to drop to 2.5% next year.
Against that backdrop, a Fed pause likely would have bolstered stocks and lowered corporate borrowing costs, juicing an economy officials have been trying to weaken to dampen inflation, says economist Ryan Sweet of Oxford Economics.
A pause also could have suggested the Fed fretted the banking system wasn’t stable, possibly stoking more stress, economists said.
Last week, the European Central Bank jacked up interest rates by a half point despite Credit Suisse’s troubles, which were quelled when the investment bank was purchased by UBS. The ECB’s move didn’t roil markets, leaving many Fed watchers more confident the Fed would follow suit.
At the same time, Goldman Sachs, among others, said a rate hike would undermine the Fed’s goal of calming financial strains and assuring Americans banks are stable, especially since the central bank’s aggressive hikes helped trigger the crisis.
SVB’s meltdown unfolded when struggling tech companies began withdrawing their money from Silicon Valley Bank for funding needs, forcing SVB to sell bonds that had lost value because of the Fed’s sharp rate hikes. The bank’s capital losses led additional customers whose deposits over $ 250,000 aren’t FDIC insured to withdraw their money.
“The question we were asking ourselves over that first week was, ‘ How did this happen?’” Powell told reporters.
Similar bank runs led to the demise of Signature Bank of New York and threatened First Republic Bank, which received $ 30 billion in deposits from JPMorgan and other major banks.
The Fed and other regulators announced they would provide funding to ensure depositors at SVB, Signature and possibly other banks that pose a risk to the financial system could access all their money.
The New York Times has reported that SVB had been cited by the Fed several times for its high share of uninsured deposits and large bond investments and was undergoing a full- scale review when the crisis intensified.
Powell, however, said the bank’s meltdown worsened rapidly.
“It’s clear we do need to strengthen supervision and regulation and I plan to support that,” he said.