Notwithstanding the banking crisis, the Fed raises interest rates by 0.25 point to fight inflation. WASHINGTON— Wednesday, the Federal ...
Notwithstanding the banking crisis, the Fed raises interest rates by 0.25 point to fight inflation.
WASHINGTON— Wednesday, the Federal Reserve raised its key short-term interest rate by a quarter of a percentage point. This was part of its aggressive campaign to bring down inflation, which is still going on even though the collapse of Silicon Valley Bank has caused a lot of trouble in the financial world.
But Fed officials know that the crisis will make it harder for banks to lend money and will hurt the economy and inflation. They now expect only one more rate walk this year, and even that move is uncertain.
The Fed expects another quarter-point increase to a peak range of 5% to 5.25%, which is the same as its estimate from December and lower than what the markets expected before SVB went bankrupt, according to the median estimate of the officials.
At a news conference, Fed Chair Jerome Powell said, "You can think of (the crisis) as the same as a rate hike, and maybe even more than that."
He also said that "it's too early to tell" how much the tighter bank lending will hurt the economy and bring down inflation, but that it could be bigger than expected and the Fed "may have less work to do."
"Right now, it's really just a matter of not knowing," he said.
In a statement released after a two-day meeting, the Fed said that recent pressures on the nation's banks will slow the economy but that the financial system is stable.
The Fed said that the U.S. banking system is strong and safe. "Recent events are likely to make it harder for people and businesses to get credit, which will hurt the economy, hiring, and inflation. It's not clear how big these effects will be."
Powell said that the movement of deposits from smaller banks to larger ones has slowed down, and that no banks are having problems like Silicon Valley Bank. He called Silicon Valley Bank "an outlier."
The central bank said that keeping consumer prices from going up is still its top priority and added, "The (Fed's policymaking committee) remains very aware of inflation risks."
The Fed also said that "additional policy firming may be appropriate" to bring inflation down to the Fed's target of 2%. This means that the Fed is almost done raising rates, and even the last quarter-point move it expects isn't a sure thing. It has said in the past that "continuing increases...will be right."
Powell, on the other hand, told reporters that the Fed had to do something on Wednesday to give people more faith that the Fed will bring down inflation, which hit a 40-year high of 9.1% in June.
"It's important that we keep that trust with both our words and our actions," he said.
25 basis point rate hike
With the latest change, the federal funds rate is now between 4.75 and 5 percent. Rates for credit cards, mortgages with adjustable rates, and other loans will go up, which will slow the economy even more. But after years of low returns, Americans, especially seniors, are finally getting more from their bank savings thanks to higher yields.