US Federal Reserve raises interest rates a quarter-point

Washington, Mar 22 (EFE).- The United States Federal Reserve Bank announced Wednesday a quarter-point increase in the federal-funds rate, bringing the target range for its benchmark interest rate to 4.75 percent to 5 percent.

This is the ninth rate hike since the Federal Open Market Committee (FOMC), the Fed’s policy-making body, embarked on monetary tightening in March 2022.

“Recent indicators point to modest growth in spending and production. Job gains have picked up in recent months and are running at a robust pace; the unemployment rate has remained low. Inflation remains elevated,” the FOMC said in a statement.

The official 12-month inflation rate was 6 percent last month, the lowest level since September 2021, but still far in excess of the Fed’s target of 2 percent.

After four successive increases of 0.75 percent in June-November 2022, the Fed decided on a hike of 50 basis points in December and 25 basis points last month.

But in March 7 testimony to a US Senate committee, Federal Reserve Chairman Jerome Powell signaled a willingness to return to larger rate increases.

“If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes,” he told senators.

Between Powell’s Senate appearance and this week’s FOMC meeting, two US regional banks failed and the government of Switzerland organized a takeover of troubled Credit Suisse by larger rival UBS.

In the case of one of the failed financial institutions, Silicon Valley Bank, the Fed’s aggressive tightening is thought to have been a factor in the collapse, as the rate hikes drove down the value of the Treasury bills that constituted most of SVB’s reserves, leaving it unable to cope with a run on deposits.

“The US banking system is sound and resilient. Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain,” the FOMC said. “The Committee is strongly committed to returning inflation to its 2 percent objective.”

At a press conference following the FOMC announcement, Powell indicated that in light of the troubles in the banking sector, the Fed’s stance on rates has shifted from anticipating future increases to one of being prepared to raise rates if conditions require it.

“We are committed to restoring price stability and all of the evidence says that the public has confidence that we will do so that will bring inflation down to 2 percent over time. It is important that we sustain that confidence with our actions, as well as our words,” he said.

“We believe, however, that events in the banking system over the past two weeks are likely to result in tighter credit conditions for households and businesses, which would in turn affect economic outcomes,” the Fed chairman said.

“It is too soon to determine the extent of these effects, and therefore too soon to tell it how monetary policy should respond,” he continued. “As a result, we no longer state that we anticipate that ongoing rate increases will be appropriate to quell inflation. Instead, we now anticipate that some additional policy firming may be appropriate.”

At the same time, he cautioned financial markets not to expect any interest rate cuts in the near future, while expressing confidence that inflation can be tamed without pushing the world’s largest economy into recession.

Regarding banks, Powell cited the government’s response to the crisis at SVB, which included guaranteeing all deposits (the usual limit is $250,000 per account), as something that should ease people’s concerns about the safety of their money.

“What I’m saying is you’ve seen that we have the tools to protect depositors when there is a threat of serious harm to the economy or to the financial system, and we’re prepared to use those tools. I think depositors should assume that their deposits are safe,” he said.

Powell likewise sought to portray the problem at SVB as an isolated instance.

“At a basic level, Silicon Valley Bank management failed badly,” he said.

In parallel with Powell’s press conference, Treasury Secretary Janet Yellen told a Senate committee that the government is not considering a move ensure bank deposits above the $250,000 limit.