Fed Raises Key Rate by Quarter-Point 03/22 14:04
The Federal Reserve extended its year-long fight against high inflation
Wednesday by raising its key interest rate by a quarter-point despite concerns
that higher borrowing rates could worsen the turmoil that has gripped the
WASHINGTON (AP) -- The Federal Reserve extended its year-long fight against
high inflation Wednesday by raising its key interest rate by a quarter-point
despite concerns that higher borrowing rates could worsen the turmoil that has
gripped the banking system.
"The U.S. banking system is sound and resilient," the Fed said in a
statement after its latest policy meeting ended.
At the same time, the Fed warned that the financial upheaval stemming from
the collapse of two major banks is "likely to result in tighter credit
conditions" and "weigh on economic activity, hiring and inflation."
The central bank also signaled that it's likely nearing the end of its
aggressive streak of rate hikes. In its statement, it removed language that had
previously said it would keep raising rates at upcoming meetings. The statement
now says "some additional policy firming may be appropriate" -- a weaker
commitment to future hikes.
And in a series of quarterly projections, the policymakers forecast that
they expect to raise their key rate just once more --- from its new level
Wednesday of about 4.9% to 5.1%, the same peak level they had projected in
Still, in its latest statement, the Fed included some language that
indicated its inflation fight remains far from complete. It noted that hiring
is "running at a robust pace" and "inflation remains elevated." It removed a
phrase, "inflation has eased somewhat," that it had included in its statement
Speaking at a news conference Wednesday, Chair Jerome Powell said, "The
process of getting inflation back down to 2% has a long way to go and is likely
to be bumpy."
The latest rate hike suggests that Powell is confident that the Fed can
manage a dual challenge: Cool still-high inflation through higher loan rates
while defusing turmoil in the banking sector through emergency lending programs
and the Biden administration's decision to cover uninsured deposits at the two
The Fed's signal that the end of its rate-hiking campaign is in sight may
also soothe financial markets as they digest the consequences of the U.S.
banking turmoil and the takeover last weekend of Credit Suisse by its larger
The central bank's benchmark short-term rate has now reached its highest
level in 16 years. The new level will likely lead to higher costs for many
loans, from mortgages and auto purchases to credit cards and corporate
borrowing. The succession of Fed rate hikes have also heightened the risk of a
The Fed's latest decision reflects an abrupt shift. Early this month, Powell
had told a Senate panel that the Fed was considering raising its rate by a
substantial half-point. At the time, hiring and consumer spending had
strengthened more than expected. Inflation data had also been revised higher.
The troubles that suddenly erupted in the banking sector two weeks ago
likely led to the Fed's decision to raise its benchmark rate by a quarter-point
rather than a half-point. Some economists have cautioned that even a modest
quarter-point rise in the Fed's key rate, on top of its previous hikes, could
imperil weaker banks whose nervous customers may decide to withdraw significant
Silicon Valley Bank and Signature Bank were both brought down, indirectly,
by higher rates, which pummeled the value of the Treasurys and other bonds they
owned. As depositors withdrew money en masse, the banks had to sell the bonds
at a loss to pay the depositors. They couldn't raise enough cash to do so.
After the fall of the two banks, Credit Suisse was taken over by UBS.
Another struggling bank, First Republic, has received large deposits from its
rivals in a show of support, though its share price plunged Monday before
The Fed is deciding, in effect, to treat inflation and financial turmoil as
distinct problems, to be managed simultaneously by separate tools: Higher rates
to tame inflation and greater Fed lending to banks to calm financial turmoil.
The Fed, the Federal Deposit Insurance Corp. and Treasury Department agreed
to insure all the deposits at Silicon Valley and Signature, including accounts
that exceed the $250,000 limit. The Fed also created a new lending program to
ensure that banks can access cash to repay depositors, if needed.
But economists warn that many mid-size and small banks, to conserve capital,
will likely become more cautious in their lending. A tightening of bank credit
could, in turn, reduce business spending on new software, equipment and
buildings. It could make it harder for consumers to obtain auto or other loans.
Some economists worry that such a slowdown in lending could be enough to tip
the economy into recession. Wall Street traders are betting that a weaker
economy will force the Fed to start cutting rates this summer.
The Fed would likely welcome slower growth, which would help cool inflation.
But few economists are sure what the effects would be of a pullback in bank
Other major central banks are also seeking to tame high inflation without
worsening the financial instability caused by the two U.S. bank collapses and
the hasty sale of Credit Suisse to UBS. Even with the anxieties surrounding the
global banking system, for instance, the Bank of England faces pressure to
approve an 11th straight rate hike Thursday with annual inflation having
And the European Central Bank, saying Europe's banking sector was resilient,
last week raised its benchmark rate by a half point to combat inflation of
8.5%. At the same time, the ECB president, Christine Lagarde, has shifted to an
open-ended stance regarding further rate increases
In the United States, most recent data still points to a solid economy and
strong hiring. Employers added a robust 311,000 jobs in February. And while the
unemployment rate rose, from 3.4% to a still-low 3.6%, that mostly reflected an
influx of new job-seekers who were not immediately hired. In its latest
quarterly projections, the Fed predicts that the unemployment rate will rise
from its current 3.6% to 4.5% by year's end.