- Natalie Sherman
- Economics Correspondent – New York
Federal Reserve Chairman Jerome Powell called the collapse of the Silicon Valley bank an “anomaly” in a robust financial system.
The US central bank (the Federal Reserve) has raised interest rates again, despite fears that the move could add to financial turmoil after a string of recent bank failures.
The Federal Reserve raised the key interest rate by 0.25 percentage point to 5 percent, describing the US banking system as “robust and resilient”.
But he also warned that banking turmoil could hurt economic growth in the coming months.
The Federal Reserve’s decision to raise borrowing costs came in an attempt to stabilize prices.
But the sharp increase in interest rates since last year has put pressure on the banking system.
Two US banks, Silicon Valley Bank and Signature Bank, collapsed this month, partly contributed to by problems caused by high interest rates.
But financial authorities around the world have said they do not believe the failures threaten broader financial stability, and there is no need to distract from efforts to control inflation.
During the past week, the European Central Bank raised its main interest rate by 0.5 percentage points.
The Bank of England is due to decide on its interest rate on Thursday, a day after official figures showed inflation rose unexpectedly in February to 10.4 percent.
Federal Reserve Chairman Jerome Powell said the Fed continued to focus on the inflation battle. He described the collapse of Silicon Valley Bank as an “anomaly” in a robust financial system.
But he acknowledged that the recent turmoil is likely to affect growth, noting that the full impact is still unclear.
Economic effect
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The last hike in interest rates on Wednesday, the ninth consecutive decision to raise interest rates
The forecasts issued by the bank’s officials showed that the economy would grow by only 0.4 percent this year and 1.2 percent in 2024, which is a sharp slowdown from the normal rate, and less than officials’ expectations in December.
The announcement from the Fed also downplayed earlier comments that “continued” rate hikes may be needed in the coming months.
Instead, the Fed said, “Some additional policies may be appropriate.”
Ian Shepherdson, chief economist at Pantheon Macroeconomic, said the moves were “a clear sign that the Fed is in a nervous state”.
The latest rate hike on Wednesday marked the ninth consecutive decision to raise interest rates after the Fed’s meetings. The main interest rate was raised from 4.75 percent to 5 percent, the highest since 2007, while interest was near zero a year ago.
Higher interest rates mean the higher cost of buying a home, taking out a loan to expand a business, or using other debt.
The Fed expects this move to lower demand, which in turn lowers prices.
That goal is beginning to be met in the US housing market, where buying has slowed sharply over the past year, and the average selling price in February was lower than it was a year ago, the first drop in the sector in more than a decade.
But in general, prices continue to rise faster than the 2 percent rate considered healthy for the economy.
Inflation, the rate of price rises, jumped 6 percent in the 12 months to February. The cost of some items, including food and flight, is also rising faster.
Ahead of the US banking sector turmoil, Fed Chairman Powell warned that officials may need to push interest rates higher than expected to get the situation under control.
The bank’s projections show that policymakers’ predictions point to lower inflation this year, but it is lower than expected a few months ago.
However, they expect interest rates to reach 5.1 percent at the end of 2023, and the forecast has not changed since December, which means that the Federal Reserve is preparing to stop raising interest rates soon.
Powell described the impact of the latest turmoil as “the equivalent of a rate hike”.
He said the Fed might be able to raise the key interest rate less aggressively if turmoil in the financial system prompted banks to curtail lending and caused the economy to slow more quickly.
But he reiterated that the Fed will not shy away from continuing the fight against inflation.
“We have to bring inflation down to 2 percent,” he said. “There are real costs to bringing it down to 2 percent, but the costs of failing to bring inflation down will be much higher.”
