Wednesday’s Federal Reserve meeting brought the announcement of another 25-basis-point hike—which threatens to stress the banking industry.
- The Federal Reserve announced its ninth interest rate hike in 12 months on Wednesday, announcing another 25-basis-point increase.
- Since March 2022, interest rates have increased from 0.25% to a range of 4.75% to 5%.
- The U.S. Bureau of Labor Statistics announced on March 14 that the yearly Consumer Price Index (CPI) lowered slightly to 6% in February, down from 9.1% in June 2022.
- Fed Chair Jerome Powell assures that further tightening of currency will not threaten to damage the ongoing strain in the banking system.
- The Fed did shift its tone on future hikes, potentially indicating that suggested late spring hikes will slow or halt for the immediate future.
Why It’s News
Wednesday’s announcement signals that the fight against inflation is far from over and that the Fed is willing to take bullish risks to address it. The hike comes amidst the ongoing aftermath of the Silicon Valley Bank crisis, with the national banking system coming under immense pressure and stress as the Fed bailed out banks with more than $153 billion.
As we previously reported, the Fed is sitting in a dangerous position where it must choose one of two risky decisions—slow down interest rate hikes and risk inflation or speed interest rate hikes up and risk another banking crisis, as bank’s treasuries are devalued, and liquidity dries up.
The Fed may be emboldened to continue tightening by the U.K. Office for National Statistics’ announcement on Wednesday that a three-month decline in inflation ended with a spike of 10.4% for the month of February. The Bank of England aggressively countered rising interest rates with a 50-basis-point hike last week in the midst of the banking crisis.
The Fed remains committed to its goal of lowering the CPI to 2%, which may require further aggressive hikes over the next year to tighten the currency gradually. While the Fed did note that it is continuing to monitor the national situation, it may be deciding to approach further hikes more gradually in response to changes in the market.
Many Wall Street analysts had predicted holding rates steady, given the turmoil in the banking industry. At a news conference after the decision, Powell said officials had considered holding rates steady but opted to raise them given signs of still-high inflation and economic activity.
“The U.S. banking system is sound and resilient. Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain,” says Powell.
“The rhetoric from the Bank of England will continue to be that inflation is the primary concern. However, events in the banking sector have somewhat taken over, and the Monetary Policy Committee has been seeing significant divisions on the best way forward,” says Quilter Cheviot Head Richard Carter.