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The Fed raises its policy rate by a quarter of a point despite the turmoil in the banks


WASHINGTON (AP) — The Federal Reserve on Wednesday extended its year-long battle against high inflation by raising its key interest rate by a quarter point, despite concerns that higher lending rates could exacerbate the turmoil gripping the banking system.

At a news conference, Fed Chairman Jerome Powell tried to reassure Americans that it is safe to leave money in their banks two weeks after a rush of depositors raised money from Silicon Valley Bank, which collapsed in the second-largest bank failure in American history. . Signature Bank fell shortly after.

“We have the tools to protect savers when there is a threat of serious damage to the economy or financial system,” Powell said. “Depositors should assume that their deposits are safe.”

The Fed Chairman also stressed that the central bank remains focused on fighting high inflation, which may require additional rate hikes. But he also indicated that the Fed might not have to impose much more hikes if more banks reduced lending to save money. This could lead to slower growth, hiring and inflation, Powell said.

The Fed is “trying to have its cake and eat it too,” said Subadra Rajappa, head of interest rate strategy at investment bank Societe Generale. “They wanted to show a preference for walking, but didn’t really want to commit to more walks.”

The Fed even signaled that it may be nearing the end of its aggressive series of rate hikes. In its policy statement, it removed language that had previously said it would continue to raise rates at future meetings. The statement now says that “some additional policy strengthening may be appropriate” – a weaker commitment to tightening lending.

And in their latest quarterly economic projections, policymakers predict they expect to raise their policy rates just once more – from the new level of around 4.9% to 5.1%, the same peak they had predicted in December.

Still, the Fed’s statement contained some language indicating that the fight against inflation is far from over. It noted that “inflation remains high,” and it removed a sentence, “inflation has eased somewhat,” the February statement said.

“The process of bringing inflation back to 2% has a long way to go and is likely to be bumpy,” Powell said.

Despite the Fed’s forecast of only one more rate hike, Powell also said the central bank could still make additional rate hikes if inflation remains chronically high. Inflation was 6% in February compared to a year agowell above the Fed’s 2% target.

If banks pull back on lending in the coming months, it could slow the economy and possibly be the equivalent of an additional quarter-point rate hike, Powell said. In other words, the problems in the banking sector could do some of the Fed’s job of slowing the economy and cooling inflation.

“Events in the banking system over the past two weeks are likely to lead to tighter credit conditions for households and businesses,” said the Fed chairman. “It is too early to determine the magnitude of these effects and therefore too early” for the Fed to know how or if its interest rate plans might be affected.

Wednesday’s rate hike, the Fed’s ninth since last March, suggests Powell is confident the Fed is up to a dual challenge: keeping still high inflation cool through higher interest rates unrest in the banking sector due to emergency loan programs and the decision of the Biden administration to cover uninsured deposits at the two failed banks.

Pressed his press conference about missing the Fed, which observers said were clear signs Silicon Valley Bank was at high risk of collapse Powell acknowledged that “we need to strengthen oversight and regulation.”

But he stated that the overall banking system was secure, saying, “These are not weaknesses that are generally in the entire system.”

Powell pledged not to interfere with the Fed’s investigation into its oversight and regulatory shortcomings regarding Silicon Valley, which was announced last week. It will be led by the central bank’s deputy chairman for supervision, Michael Barr.

With Wednesday’s hike, the Fed’s short-term interest rate has reached its highest level in 16 years. The new level is likely to lead to higher costs for many loans, from mortgages and car purchases to credit cards and business loans. The succession of rate hikes by the Fed has also increased the risk of a recession.

The Fed’s latest policy decision reflects an abrupt shift. Early this month, Powell had told a Senate panel that the Fed was considering it increase the rate by a significant half point. At the time, recruitment and consumer spending had grown more than expected. Inflation data was also revised upwards.

The problems that suddenly broke out in the banking sector two weeks ago probably led the Fed to raise its benchmark interest rate by a quarter instead of half a point.

Silicon Valley Bank and Signature Bank were both brought down indirectly by higher interest rates, which undermined the value of the government bonds and other bonds they owned. Because savers withdrew money en masse, the banks had to sell the bonds at a loss to pay the savers. They couldn’t raise enough money to do this.

After the collapse of the two banks, Credit Suisse was taken over by UBS. Another struggling bank, First Republic, has received large deposits from its rivals as a show of support, though its share price plummeted Monday before stabilizing.

Other major central banks are also trying to curb high inflation without exacerbating financial instability. Even with the concerns surrounding the global banking system, for example, the Bank of England is under pressure to approve an 11th consecutive rate hike on Thursday.

And the European Central Bank, saying the European banking sector was resilient, raised its benchmark interest rate by half a point last week to combat inflation of 8.5%. At the same time, ECB President Christine Lagarde has taken an open stance about further rate increases

In the United States, the latest data continues to point to a solid economy and strong hiring. Employers added no fewer than 311,000 jobs in February. And while the unemployment rate rose from 3.4% to a still low 3.6%, it mainly reflected an influx of new job seekers who were not immediately hired. In its latest quarterly forecast, the Fed predicts that the unemployment rate will rise from the current 3.6% to 4.5% by the end of the year.

Joanna Swanson

Joanna Swanson is Europe correspondent at the Thomson Reuters Foundation based in Brussels covering politics, culture, business, climate change, society, economies and inclusive tech. With specific focus in breaking news, she has covered some of the world's most significant stories.