US hikes rates for 9th consecutive time: Fight or flight
The ongoing banking crisis has failed to influence the US Federal Reserve. In an unsurprising move, the Fed hiked interest rates by 25 basis points in an aggressive push to tame high inflation. This marks the ninth consecutive rate rise. The rate hike is in response to the acceleration of job growth, pay increases, and consumer spending, compounding inflation concerns.
Why does this story matter?
The Fed was faced with a wrenching decision this week: raise interest rates or not? The American central bank's dilemma was driven by the fall of two American banks, Silicon Valley Bank (SVB) and Signature Bank. The fall triggered a banking crisis culminating in UBS' takeover of Credit Suisse. The Fed's rate hikes were blamed as one of the reasons for the crisis.
Interest rates hiked to a range of 4.75% to 5%
The current hike takes the Fed's key short-term interest rate to a range of 4.75% to 5%, the highest rate since 2007. Jerome Powell, the Fed chair, said the impact of the banking crisis is "uncertain," but inflation remains "elevated." The central bank's rate-setting panel aims to achieve maximum employment and inflation at the rate of 2%, the Fed said in a statement.
US banking system is sound and resilient: Fed chair
The Fed's new rate hike might lead to further concerns about the banking system. However, the central bank believes the US banking system is "sound and resilient." According to Powell, no bank is displaying the same issues as SVB, calling it an "outlier." But he is unsure how stricter lending will affect the economy and tame inflation.
Tempering inflation remains the central bank's priority
Some, including banking giant Goldman Sachs, hoped the Fed would pause rate hikes amid the banking crisis. However, the central bank has underscored that its priority remains to control consumer price increases. The Fed believes the banking crisis, along with rate hikes, could curb spending even further. According to Powell, the central bank may have less work to do due to the banking crisis.
Fed's interest rate hikes are nearing an end
Many expected the Fed to raise interest rates by half a point. However, in line with its December estimates, the central bank went for a quarter-point hike. That can be considered a nod to the banking crisis. It estimates another quarter-point increase this year, which may not happen. There is room for concern, but rate hikes are nearing their end.
