Fed pushes rate hike by a quarter point despite banking turmoil

The US Federal Reserve continued its tightening campaign on Wednesday despite the recent turmoil in the banking sector, raising interest rates by a quarter of a percentage point and announcing another hike.

After its most recent two-day meeting, the Federal Open Market Committee voted to raise the federal funds rate to a new target range of 4.75 percent to 5 percent, the highest level since 2007.

In a statement Wednesday, the FOMC confirmed that the US banking system is “solid and resilient” but the “extent” of the economic impact of the recent unrest is “uncertain.”

“Recent developments are likely to result in tighter credit conditions for households and businesses, weighing on economic activity, hiring and inflation,” the committee said.

The move comes at a time of acute uncertainty about whether the US government has done enough to avert a full-blown crisis stemming from the implosion of Silicon Valley Bank and Signature Bank earlier this month.

In a sign of how much recent bank failures have changed the Fed’s calculus, the debate among officials a few weeks ago centered on whether the Federal Reserve should quicken the pace of its rate hikes by opting for a half-point hike decided.

In February, the Fed returned to a more traditional quarter-point cadence after conducting a series of large rate hikes over the past year. But earlier this month Chairman Jay Powell hinted at the possibility of a return to a half-point rise amid fears the central bank hasn’t done enough to contain inflation.

In its statement, the FOMC said it remained “very vigilant on inflationary risks” but signaled it was closer to completing its rate hike campaign than it was a month ago.

“The committee understands that additional monetary tightening may be warranted” to bring inflation back to the central bank’s 2 percent target, he added.

Wednesday’s decision was accompanied by a revised set of projections for monetary policy through the end of 2025, known as the “dot plot”, as well as forecasts for growth, unemployment and inflation.

Most officials now expect the federal funds rate to peak at 5 to 5.25 percent this year and hold that level through at least 2024. Policymakers planned a series of rate cuts through the end of next year, with the federal funds rate falling back to 4.3 percent.

The Federal Reserve last released official estimates in December, when most expected the federal funds rate to peak at 5-5.25 percent.

In the days leading up to the March meeting, former officials, economists and investors were at odds over how the Fed should proceed, with supporters of a pause arguing that the central bank could further unsettle an already tenuous situation by spurring another rate hike.

After the collapse of SVB and Signature, the Fed launched an emergency lending facility to help small and medium-sized banks struggling with a flight of depositors to larger institutions. It also worked with the Treasury Department and the Federal Deposit Insurance Corporation to guarantee deposits held at the two failed banks — even those that exceed the $250,000 threshold for federal insurance.

On Tuesday, Treasury Secretary Janet Yellen said the US authorities could take further steps to support the financial system if necessary.

Her comments followed an announcement by the Fed and five other top central banks on Sunday that they would improve access to US dollar liquidity following UBS’s forced takeover of Credit Suisse, brokered by Swiss officials last weekend.

The Fed has come under fire over recent bank failures, and has raised questions about how closely officials have been monitoring regional lenders following a rollback of rules governing them — actions Powell himself advocated in 2019.

Michael Barr, the Fed’s oversight director, said the central bank is conducting a review of how it manages the SVB.

On Wednesday, Republican Sen. Rick Scott of Florida and progressive Democrat Elizabeth Warren of Massachusetts introduced a bipartisan bill that would replace the Fed’s internal investigator with one appointed by the president. Warren has also joined other lawmakers in calling for stricter regulation of the banking sector.