The Federal Reserve has announced that it will increase its benchmark interest rate by a quarter of a point, marking the ninth consecutive rate increase in its fight against inflation. The decision was unanimous and places the key benchmark federal funds rate at a range of 4.75% to 5%, the highest it has been since 2007. The Fed also indicated that rate increases may soon come to an end, and future hikes will depend on incoming data reports. This decision has caused concern due to recent bank failures and growing financial sector instability.
Committed to Reducing Inflation
Despite these concerns, the Federal Reserve remains committed to its mission of reducing high inflation. However, the implosion of Silicon Valley Bank earlier this month has complicated matters, as rising interest rates were a direct cause of the bank’s failure. Officials are uncertain how banking-sector stress will affect the broader economy, but they remain confident that the U.S. banking system is sound and resilient.
New economic projections show that a majority of Federal Reserve officials expect rates to rise to 5.1% this year, implying just one more quarter-point increase. Quarterly forecasts suggest that the U.S. central bank will not cut interest rates until 2024, to a rate of about 4.3%. Officials also indicate that economic growth will slow sharply this year, and unemployment will increase to a rate of 4.5%. The Fed expects the jobless rate to remain elevated in 2024 and 2025 as steeper rates continue to push up borrowing costs.
This announcement marks a dovish swing from just two weeks ago when Chairman Jerome Powell suggested the Federal Reserve may need to pick up the pace of rate increases and raise rates higher than previously anticipated. The Labor Department reported last week that the consumer price index rose 0.4% in February from the previous month, and prices climbed 6% on an annual basis. Core prices, which strip out the more volatile measurements of food and energy, climbed 0.5% in February and are up 5.5% on a 12-month basis.
Impact of Recent Banking Disruptions
The recent bank failures have caused concern for the Federal Reserve, forcing them to balance price stability and financial stability. Silicon Valley Bank catered to tech companies, venture capital firms, and high-net-worth individuals, which were pulling cash at a rapid pace as the once red-hot tech sector cooled. When the bank announced it was trying to raise capital from investors and would take a $1.3 billion loss on long-term securities that had tumbled in value amid higher interest rates, depositors panicked, and a bank run ensued.
U.S. regulators took extraordinary steps to contain the fallout from the bank’s collapse and shore up wavering confidence in the financial system. They protected all deposits at the two institutions, even those holding funds that exceeded the FDIC’s $250,000 insurance limit. The Fed remains attentive to inflation risks and will continue to monitor incoming data reports to determine future rate hikes.