Federal Reserve pushes ahead with quarter point rate increase despite banking turmoil

The US central bank signaled that it might soon end its monetary tightening campaignDespite recent banking turmoil, the Federal Reserve continued to push for a quarter-point rate increase on Wednesday. However, it indicated that it might soon end its monetary tightening campaign.

The Federal Open Market Committee decided to raise the federal funds rate from 4.75 percent to 5.0%, its highest level since 2007.

The FOMC released a statement Wednesday stating that the US banking system is “sound and resilient”, but that it was uncertain how the economic fallout of the failures of two lenders will affect the country.

Members of the US central bank’s policy-setting committee have removed the repeated warning that “ongoing rises” are necessary to control the rising inflation. This is a clear signal that they are almost done with aggressive rate increases in the past decade.

Instead, the committee stated that “some additional policy firming may have to be done” in order to bring inflation back below the bank’s target of 2 percent.

Wednesday’s rate increase comes amid intense uncertainty about whether the US government has done enough in order to avoid a full-blown crisis resulting from the collapse of Signature Bank and Silicon Valley Bank earlier this month.

Jay Powell, Fed chair, stated in a press conference that the Fed’s response to the failures included a guarantee for all deposits at the two lenders as well as a new Fed lending facility. He also said that the measures “demonstrate the safety of all depositors’ saving.”

As a sign of the impact of recent bank failures on the Fed’s calculations, officials debated whether the Fed should accelerate its rate rises by choosing a half-point hike.

Powell stated that the Fed committee had “considered” a pause, which is a rate increase of no more than 1%, due to banking turmoil. However, its members ultimately decided to push ahead with a quarter point increase with a “very solid consensus”.

After implementing several large increases last year, the Fed had moved to a quarter-point cadence in February. Powell suggested earlier this month that the Fed could return to a half point rise to address concerns about inflation.

After the statement was released, stocks rose initially before falling after Powell dismissed suggestions that the bank would cut rates this year. Lower expectations for interest rate increases ahead indicated by a dip in the yield on the Treasury’s two-year Treasury.

David Page, head macro research at Axa Investment Management said that a hike would have raised more questions about the banking system. “The Fed assumes now that credit conditions will tighten in some way [due to banking turmoil] which will eventually feed into the economy.

Wednesday’s decision was accompanied by revised projections of monetary policy up to the end 2025, also known as the “dot chart”, and forecasts for growth unemployment, inflation, and growth.

Officials still believe the policy rate will peak at 5 to 5.25 percent this year, and that it will remain at that level until at least 2024. The federal funds rate will drop back to 4.3%, as policymakers have planned a series rate cuts.

Official forecasts predict slower growth and higher inflation. The growth rate is expected to slow to 0.4% this year, before rising to 1.2% in 2024 and 1.9% in 2025. Forecasted unemployment rates will peak at 4.6% next year.

The majority of policymakers anticipate that the core personal consumption expenditures price indicator will hover around 3.6% by 2023 before dropping to 2.6% in 2024. Both estimates are 0.1 percentage point higher than December’s.

Ex-officials, economists, and investors disagreed about how the Fed should proceed in the days leading to March’s meeting. Those who supported a pause believed that the central bank could further upset an already fragile situation by raising rates.

After the recent series of bank failures, the Fed was under fire. Officials were asked how closely they monitored regional lenders after a rollback of rules, which Powell endorsed.

Michael Barr, the Fed’s supervisory affairs leader, stated that the Fed was conducting an evaluation of its management of SVB.

A bipartisan bill was introduced Wednesday by Rick Scott, a Republican senator from Florida, and Elizabeth Warren, a progressive Democrat from Massachusetts. It would replace the Fed’s internal investigator with one that is appointed by the President. Warren also joined forces with other lawmakers to push for tighter regulation of banking.

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