US Federal Reserve approves new quarter-point rise in benchmark rate

Washington, May 3 (EFE).- The US Federal Reserve continued its more than a year-long battle against inflation, voting Wednesday to raise its benchmark interest rate by an additional quarter point.

The latest hike, which leaves the federal-funds rate at a target range of between 5 percent and 5.25 percent, was in line with economists’ expectations.

It also comes amid major concerns about the banking sector in the wake of JPMorgan Chase’s acquisition of failing regional lender First Republic Bank earlier this week in a government-led rescue, the largest US bank failure since the 2007-2008 financial crisis.

In a statement after its latest two-day meeting, the Federal Open Market Committee, the central bank’s monetary policy-making body, did not expressly indicate that Wednesday’s action would be the last hike before a pause on further monetary tightening.

But, notably, it did take out language that had been included in its previous policy statement in March, when it stated that the Committee “anticipates that some additional policy firming may be appropriate … to return to inflation to 2 percent over time.”

Instead, the FOMC said Wednesday that it would assess economic and financial developments and the cumulative impact of 14 months of rate increases “in determining the extent to which additional policy firming may be appropriate.”

Like it did on March 22, less than two weeks after the collapse of Silicon Valley Bank, it reassured markets on Wednesday by saying “the US banking system is sound and resilient.”

The FOMC explained that after 10 consecutive rate hikes dating back to March 2022 economic activity expanded “at a moderate pace in the first quarter.”

It also noted that job gains have been “robust” in recent months and that the unemployment rate has remained low and inflation continues to be “elevated.”

Despite the modified statement indicating a pause in the rate hikes could be coming as soon as the next FOMC meeting, Fed Chairman Jerome Powell denied at a post-meeting news conference that the recent bank failures had triggered a shift in the central bank’s policy stance.

“A decision on a pause was not made today,” Powell said. “We’ll be driven by incoming data, meeting by meeting, and we’ll approach that question at the June meeting.”

He also underscored the Fed’s optimistic assessment about the US banking sector, saying that conditions “have broadly improved since early March and that the US banking system is sound and resilient.”

“We’re committed to learning the right lessons from this episode, and we’ll work to prevent events like these from happening again,” he said.

The Federal Reserve currently finds itself forced to balance its determination to bring down inflation, which fell to 5 percent in March but is still well above its long-term target, with new concerns about the impact of its policies on the banking sector.

Troubled financial institutions like Silicon Valley Bank, Signature Bank and First Republic Bank, for example, were caught off-guard by the Fed’s rapid pace of rate hikes, which sharply reduced the value of their holdings of government bonds and mortgage-backed securities.

That scenario left them highly vulnerable when a bank run occurred and they needed to raise funds quickly.

EFE

pem/mc