The Federal Reserve increased interest rates by a quarter of a percentage point and indicated that it has not finished raising them, despite the risk of aggravating the banking crisis that has shaken global markets.
The Federal Open Market Committee (FOMC) voted unanimously to raise its target for the federal funds rate to a range of 4.75% to 5%, the highest since September 2007, when rates were at their peak on the eve of the financial crisis. It is the second consecutive increase of 25 basis points, following a series of aggressive moves that began in March 2022, when rates were close to zero.
“The American banking system is strong and resilient”, the Fed said in a statement in Washington after a two-day meeting. At the same time, officials warned that “recent events are likely to trigger a tightening of credit conditions for households and businesses and that affect economic activity, hiring and inflation”. The extent of these effects is uncertain.
How four banks collapsed and a fifth falters in 11 days
Fed policy makers They expect rates to close 2023 at around 5.1%, unchanged from the median of the estimates from the last round of projections in December. By 2024, the median of the estimates increased from 4.1% to 4.3%.
The Chairman of the Federal Reserve, Jerome Powellwill hold a press conference at 2:30 pm Washington time.
The rise and projections suggest that policymakers remain firmly focused on bringing inflation down to their 2% target, indicating that they see rising prices—especially based on recent data—a greater threat to growth than banking turmoil. It also projects confidence that the economy and financial system remain healthy enough to withstand the string of bank collapses.
At the same time, rising borrowing costs may aggravate the banking crisisespecially since it was the higher interest rates on Treasury bond holdings that precipitated the collapse of Silicon Valley Bank (SVB) and threatened other banks. If the Federal Reserve is underestimating the extent of financial rifts, the latest move risks increasing pressures that could lead the economy to a recession.
Difficult decision
While Wednesday’s hike was in line with the expectations of most economists and traders, it was one of the central bank’s toughest decisions in recent years, as some Fed watchers and investors called for a pause to ease. the risk of financial contagion after the collapse of several banks.
The Fed “anticipates that it might be appropriate further tightening of monetary policy to achieve a tight enough monetary policy stance to bring inflation back to 2% over time,” the officials said in their statement issued at the end of the meeting.
The change in the language of the statement—policymakers had previously said that it would be appropriate to “continue raising” the benchmark rate—indicates that they want to add flexibility to pause if necessary.
The officials also removed a reference in the statement to inflation had decreased saying that price pressures remain elevated. He noted that job growth has picked up in recent months, and “records a solid pace.”
Inflation expectations in the United States fall to their lowest level
The Fed said it would maintain the same pace of reducing its balance sheet, a process known as quantitative adjustment, although recent emergency measures have increased assets again. The central bank will maintain monthly limits of $60 billion for Treasuries that can mature without being reinvested and $35 billion for mortgage-backed securities.
At the beginning of the month, before the bankruptcy of the SVB, Powell indicated that the Fed could raise rates again up to 50 basis points at this meeting to combat persistent inflation and an overly tense labor market. This week’s meeting was the first for policymakers since surprising January and February data.
The collapse of SVB and two other banks in the United States was followed in Europe by the sale of the Swiss banking giant Credit Suisse Group AG.
LM/nt
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