Fed Raises Interest Rates for Ninth Time, Despite Banking Turmoil and Inflation Concerns

Fed Continues Fight Against Inflation Despite Banking Industry Stress

The Federal Reserve raised interest rates for the ninth time in a row on Wednesday, opting to continue its campaign against high inflation despite stress in the banking industry following the collapse of two regional banks. Fed policymakers voted unanimously to raise their benchmark interest rate by a quarter percentage point to just under 5%, which will make it more expensive for people seeking car loans or carrying a balance on their credit cards.

Fed Anticipates Additional Rate Hikes May be Necessary to Restore Price Stability

Members of the Fed’s rate-setting committee said additional rate hikes may be necessary to restore price stability. On average, policymakers anticipate rates climbing by another quarter-percentage point by the end of this year, according to new projections that were also released on Wednesday.

“The Committee anticipates that some additional policy firming may be appropriate,” the Fed said in a statement.

Some Urged the Fed to Pause Rate Hikes Temporarily to Assess Banking Fallout

Some observers had urged the central bank to pause its rate hikes, at least temporarily, in order to assess the fallout from the collapse of Silicon Valley Bank and Signature Bank earlier this month. Stress in the banking system appeared to ease in recent days, however. Treasury Secretary Janet Yellen said Tuesday that large withdrawals from regional banks have “stabilized.” And bank stocks have rallied this week.

Rising Inflation Remains a Concern for the Fed

Meanwhile, consumer prices continue to climb at a rapid rate. Annual inflation in February was 6% — down from 9.1% last June, but still well above the Fed’s target of 2%. The central bank is particularly concerned about the rising cost of services, such as airline tickets and streaming TV subscriptions.

Fed Facing Scrutiny for Oversight of Failed Banks

The Fed is also facing scrutiny for its oversight of the two failed banks. Fed supervisors reportedly identified problems with Silicon Valley Bank’s risk-management practices years ago, but the problems were not corrected and the California lender had to be taken over by the U.S. government after suffering a massive bank run.

“We need to have humility, and conduct a careful and thorough review of how we supervised and regulated this firm,” said Michael Barr, the Fed’s vice chairman for supervision.

Tighter Credit Conditions Could Lead to Slower Economic Growth

The Fed will need to weigh the impact of the collapse of the two regional lenders in deciding how much to raise interest rates going forward. Since the collapse of Silicon Valley Bank and Signature Bank, other banks are expected to be more conservative about making loans. “Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation,” the Fed statement said. “The extent of these effects is uncertain.”

Tighter credit conditions, like rising interest rates, lead to slower economic growth.

Policymakers Not Projecting Recession Despite Economic Uncertainty

Still, Fed policymakers aren’t projecting a recession. On average, members of the rate-setting committee expect the economy to grow 0.4% this year, according to its projections on Wednesday. They expect the unemployment rate to climb to 4.5%, from 3.6% in February.

Credit: https://www.npr.org/2023/03/22/1165274305/the-fed-raises-interest-rates-again-despite-the-stress-hitting-the-banking-syste

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