The US Federal Reserve, also known as the Fed, has increased interest rates for the 10th time in a row. With the continued worst banking turmoil since the global financial crash, the rate has increased by 0.25 percentage points in the Fed’s effort to tackle inflation. Although the inflation rate is less than half the rate of price rises in the UK, the Fed’s chair, Jerome Powell, said that there is a “long way to go” to bring down inflation. However, Powell indicated that Wednesday’s rise may be the last for now, as the Fed will take a “data-dependent approach” on future hikes, using economic data such as unemployment rate and number of jobs vacancies to inform their decision.
While higher interest rates lead to higher profits for lenders, they also put pressure on banks as some government bonds lose value. This was one of the factors behind the collapse of midsize regional lenders in the US, including First Republic, which was bought by JPMorgan Chase before market open on Monday. Despite banking sector assurances, Mr Powell said strain from the banking system in March, when Silicon Valley Bank collapsed, is resulting in even “tighter” financial conditions.
Following the increase, US interest rates stand at 5% to 5.25%, up from 4.75% to 4.5% since the last increase in March. This is the highest interest rate in the US since 2007. With fears of a US recession growing as the economy slows sharply in the first quarter, increased interest rates make borrowing more expensive, driving up the cost of mortgage payments and credit card debt.
