On Wednesday, the Fed hikes interest rates for the ninth time in a row, choosing to do so despite pressure on the banking sector as a result of the failure of two regional banks.
The benchmark interest rate of the Fed was increased by a quarter of a percentage point to just under 5% by a unanimous decision of policymakers, increasing the cost of credit card debt and car loans.
The Fed’s rate-setting committee members think that in order to regain price stability, slightly higher rates may be required. New estimates that were also provided on Wednesday show that policymakers expect rates to rise by an additional quarter-point by the end of the year.
The Fed issued a statement in which it stated that “The Committee anticipates that some additional policy firming may be required.”
Banking Collapses Had Set Off an Alarm
In order to evaluate the effects of Silicon Valley Bank and Signature Bank’s failure earlier this month, some commentators had urged the central bank to temporarily halt its rate increases.
Yet recently, there seemed to be less stress in the banking system. Janet Yellen, secretary of the Treasury, stated on Tuesday that significant withdrawals from local banks have “steadied.”
The monetary policy statement from the Fed stated that “the U.S. banking system is sound and resilient.”
While this is going on, consumer costs are quickly increasing. Yearly inflation in February was 6%, significantly above the Fed’s target of 2% but down from 9.1% in June.
The cost of services like airline tickets and streaming TV subscriptions is particularly of concern to the central bank.
In his post-meeting news conference, Fed chairman Jerome Powell told reporters, “My colleagues and I are acutely aware that high inflation imposes significant hardship as it erodes purchasing power, especially for those least able to meet the higher cost of necessities like food, housing, and transportation.”
The Fed Is Under Pressure Over Bank Collapses
The Fed’s management of the two collapsed banks has come under fire as well. Years ago, Fed regulators allegedly found issues with Silicon Valley Bank’s risk-management procedures; yet, the California lender had to be taken over by the US government as a result of a severe bank run.
Michael Barr, the Fed’s vice chairman for supervision, said, “We need to be humble and do a rigorous and complete examination of how we supervised and regulated this firm.
Barr is conducting the investigation and has committed to releasing a report by May 1. Next week, he will also give testimony before two congressional committees. Others have demanded an impartial investigation into the Fed’s involvement in the bank failures.
There will undoubtedly be independent investigations, Powell said to reporters on Wednesday. Investigations take place when a bank falls, and we naturally welcome that.
Moreover, Senators Rick Scott of Florida and Elizabeth Warren of Massachusetts have suggested that the president hire an external inspector to replace the Fed’s internal inspector general.
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Recession Fears Have Grown Over Banking Turmoil
While determining how much to raise interest rates going ahead, the Fed will need to consider the effects of the failure of the two regional lenders.
As Silicon Valley Bank and Signature Bank failed, it is anticipated that other banks will be more cautious when granting loans.
Recent events “are likely to have an adverse impact on economic activity, hiring, and inflation” and tighten lending conditions for individuals and businesses, according to a Fed statement. “It is unclear how large these consequences will be.”
Slower economic growth is caused by more stringent lending requirements, such as higher interest rates.
According to Kathy Bostjancic, chief economist at Nationwide, “Credit is the grease that makes small firms’ wheels turn and makes the overall economy run.”
She warned, “You’re going to have a fairly big—I would expect—pullback if that credit starts to become choked off.
That might help the Fed in its efforts to reduce inflation. Yet, it also increases the possibility of the economy entering a recession.
Until now, the Fed’s policymakers do not anticipate a recession. According to its forecasts released on Wednesday, the rate-setting committee’s members anticipate the economy would expand by an average of 0.4% this year. They anticipate that the jobless rate will increase from 3.6% in February to 4.5%.
