On Wednesday, the Federal Reserve increased interest rates for the ninth time in a row, continuing its fight against high inflation despite increased strains in the banking industry due to the failure of two regional banks.
Fed policymakers unanimously decided to raise their benchmark interest rate by a quarter percentage point, raising it from 4.5% to just under 5%, making car loans and carrying balances on credit cards more expensive for those seeking financing or carrying a balance.
On Wednesday, members of the Federal Reserve rate-setting committee expressed a view that slightly higher interest rates may be necessary in order to restore price stability.
On average, policymakers anticipate another quarter-percentage point rise in rates by year’s end, according to new projections released simultaneously on Wednesday.
“The Committee believes that some additional policy tightening may be appropriate,” the Fed stated in a statement.
Banking failures have raised alarm bells
Some observers had called on the central bank to temporarily pause its rate hikes, in order to assess the effects of Silicon Valley Bank and Signature Bank’s collapse earlier this month.
However, the stress in the banking system appeared to have eased in recent days. Treasury Secretary Janet Yellen reported on Tuesday that large withdrawals from regional banks have “stabilized.”
“The U.S. banking system remains sound and resilient,” the Fed Rate Hike monetary policy statement declared.
Consumer prices continue to rise at an unsustainable pace. Annual inflation for February was 6.0%, down from 9.1% last June but still exceeding the Fed’s target of 2%.
The central bank is particularly worried about the rising cost of services like airline tickets and streaming TV subscriptions.
At his news conference following the meeting,Fed Rate Hike Chairman Jerome Powell reminded reporters that high inflation can cause significant hardship by diminishing purchasing power, particularly for those least able to cope with rising costs for essential items like food, housing, and transportation.
The Fed is under increasing scrutiny due to bank failures
The Fed is also being scrutinized for its oversight of two failed banks. Reports indicate Fed supervisors identified issues with Silicon Valley Bank’s risk-management practices years ago, yet these shortcomings weren’t rectified and eventually led to its takeover by the U.S. government following a massive bank run in California.
“We must show humility and conduct an extensive review of how we monitored and regulated this firm,” said Michael Barr, vice chairman for supervision at the Fed.
Barr is leading the review and has promised a report by May 1. Additionally, he’ll appear before two Congressional committees next week. Many have called for an independent inquiry into the Federal Reserve’s role in bank failures.
On Wednesday, Powell assured reporters of the certainty of independent investigations. When a bank fails, there will be inquiries and we fully support that.”
Senators Elizabeth Warren (D-Mass.) and Rick Scott (R-Fla.) have both proposed replacing the Federal Reserve’s internal inspector general with an outside official appointed by the president.
On March 16, 2023, Senator Elizabeth Warren (D-MA) questioned Treasury Secretary Janet Yellen during a hearing by the Senate Finance Committee in Washington D.C.
She and Republican Sen. Rick Scott had earlier called for an appointment of an internal inspector general by President Trump and confirmation by the Senate, but neither senator was successful in getting such a measure passed.
Recession worries have grown over banking turmoil
When determining how much to raise interest rates moving forward, the Fed must take into account the effects of the collapse of two regional lenders.
Following the failures of Silicon Valley Bank and Signature Bank, other banks are expected to be more cautious when making loans.
“Recent developments are likely to tighten credit conditions for households and businesses, potentially impacting economic activity, hiring, and inflation,” according to a Fed statement. However, its exact extent remains uncertain.”
Tighter credit conditions, such as rising interest rates, can result in slower economic growth.
“Credit is the fuel that keeps small businesses moving and keeps the economy healthy,” said Kathy Bostjancic, chief economist at Nationwide.
“If that credit begins to get taken advantage of,” she warned, “you could see a major setback.”
That could provide the Fed with some relief in curbing inflation, but it also raises the potential risk of throwing the economy into recession.
Still, Fed policymakers aren’t forecasting a recession. On average, members of the rate-setting committee anticipate economic growth to reach 0.4% this year according to their projections on Wednesday.
They also forecast an increase in unemployment from 3.6% in February to 4.5% by year-end.