Federal Reserve Hikes Interest Rate 0.25 Point to Curb Inflation Despite Banking Chaos

On Wednesday, the Federal Reserve raised its key short-term interest rate by 0.25 percentage points. The Feds continue to push forward with its aggressive campaign to quiet inflation despite financial chaos after Silicon Valley Bank’s collapse. 

However, the reserve’s acknowledgment of the crisis will constrain banks’ lending and weaken inflation and the economy. Officials are forecasting just one more rate hike this year, although that move remains uncertain. 

The Fed anticipates another quarter-point increase to a peak range of 5 to 5.25%, aligned with its December estimate, yet lower than the level markets expected before SVB’s meltdown, according to the median estimate by officials. 

“You can think of (the crisis) as being the equivalent of a rate hike and perhaps more than that,” said Jerome Powell, chairman of the Federal Reserve, at a news conference. 

Powell added that “it’s too soon to tell” how much the stricter bank lending will tame inflation and cripple the economy but maintained it could be more significant than expected and the Fed “may have less work to do.”

“It’s really just a question of not knowing at this point,” said Powell.

Powell maintains financial system is solid

After the two-day meeting, the Fed issued a statement acknowledging recent strains in the country’s banks. It said they might soften the economy but maintain a stable financial system. 

“The U.S. banking system is sound and resilient,” said the Fed. “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.”

Powell said transferring deposits from middle-sized banks to bigger ones has cooled, and no banks are displaying the troubles that plagued Silicon Valley Bank and calling the bank “an outlier.”

The central bank emphasized that its priority remains tempering increases in consumer prices and added, “The (Fed’s policymaking committee) remains highly attentive to inflation risks.”

Additionally, the Fed said, “additional policy firming may be appropriate” to decrease inflation to the Fed’s 2% target and signaled it is close to winding down the hiking cycle.

According to Powell, “It is important that we sustain that confidence with our actions as well as our words.”

With the recent banking troubles in recent days, most economists predicted the Fed would lift the fund’s rate by a quarter point. The move would acknowledge the banking troubles by hiking less than the half point that was eyed before the crisis. 

The rate increase would keep the Feds on track to tamp down inflation that has surged again this year after easing up late in 2022. Pay increases, consumer spending, and job growth have also accelerated after downshifting last year, compounding inflation concerns.