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Federal Reserve Pausing Further Rate Increases After Recent Bank Failures



Fed Raises Interest Rates, But Indicates a Pause in Further Increases

The Federal Reserve raised interest rates by a quarter of a percentage point, but the collapse of two US banks has indicated a pause in any further increases in borrowing costs. Fed Chair Jerome Powell reassured investors that the banking system is not weak as these “are not weaknesses that are running broadly through the banking system.” Powell still intends to fight inflation whilst taking into account recent bank failures and the subsequent impact on demand and lending, with the Fed’s latest policy statement no longer stating that “ongoing increases” in rates will likely be appropriate.

Recent Banking Sector Turmoil

The collapse of Silicon Valley Bank and Signature Bank have led to a rout in banking stocks due to concerns about the fragility of the banking system, leading UBS Group to takeover Credit Suisse Group AG to avert a wider crisis. The Federal Reserve’s rate hikes have been blamed for the banking sector’s meltdown, leading officials to attempt to restore confidence in the banking system.

Insuring Deposits and Restoring Confidence

Citigroup CEO Jane Fraser expressed confidence in US banks and claimed the turmoil did not represent a credit crisis. Treasury Secretary Janet Yellen clarified that the government “is not considering insuring all uninsured bank deposits” and the Treasury Department has not considered anything to do with guarantees for assets. However, this has not eased all investors’ anxieties, with Luke Ellis, CEO of hedge fund Man Group, believing that further bank failures are imminent. Policymakers argue that, unlike 15 years ago, banks are better capitalised and funds are more easily available.

New Legislation for Bank Supervision

Legislation is being introduced to replace the Fed’s internal watchdog with one appointed by the president, aiming to tighten bank supervision following the failures of SVB and Signature Bank. Republican Rick Scott and Democrat Elizabeth Warren blame the collapse of two banks on regulatory failures at the US central bank, which has so far operated with an internal inspector general who reports to the Fed board.



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