US Federal Reserve raised rates to its highest level since 2007
(ORDO NEWS) — The US Federal Reserve raised the base rate for the ninth time in a row – now it is at its highest level since 2007. Despite the banking crisis, the regulator did not take a break in tightening monetary policy in order to fight inflation.
The US Federal Reserve System (FED) raised the base rate range by 0.25 percentage points to 4.75-5% per annum. This is the highest rate since September 2007 and the ninth consecutive increase. The Fed is using a 25 basis point step for the second time in a row, while in 2022 it raised the rate by 75 or 50 basis points.
The Federal Open Market Committee (FOMC) stressed in a statement that the US banking system is “strong and resilient” but acknowledged that “recent developments” are likely to put pressure on economic activity, the labor market and inflation. How severe this impact will be is not yet clear, the committee said, adding that it is “treating inflationary risks very carefully.”
At the same time, the statement no longer uses the familiar phrase about the appropriateness of “continuing the rate hike,” The Wall Street Journal noted. The committee has written about this in the previous eight rate statements, but this time noted that “some additional monetary tightening” might be appropriate.
The central bank faces one of the biggest challenges in recent years: whether to keep raising rates to fight inflation, or to keep them stagnant to help quell the worst banking crisis since 2008,” the WSJ wrote before announcing the decision.
As early as March 7, Fed Chairman Jay Powell made it clear that in order to fight inflation, the regulator is ready to accelerate the pace of raising rates from 25 to 50 basis points. But over the past two weeks, US financial authorities, according to the Financial Times, “faced acute uncertainty” due to the largest banking collapse since the 2008 crisis: California’s Silicon Valley Bank and New York’s Signature Bank closed within a couple of days, included in the top 30 US banks. Another regional bank, First Republic, faced an outflow of deposits.
One of the reasons for the problems of banks was the aggressive increase in the Fed’s rate in 2022 to fight inflation – from 0-0.25 to 4.5-4.75%. Banks kept significant amounts of assets in government bonds and mortgage-backed bonds, the value of which fell sharply against the background of the rate increase. As a result, the cost of funding for banks increased, margins decreased, and they could not cope with the outflow of client funds from deposits.
The banking crisis has generated discussions about the future policy of the Fed, notes the FT. Supporters of the rate hike said that economic conditions (in particular, strong data on the labor market and inflation) allow not to stop the tightening of monetary policy. Supporters of the pause argued that by raising the rate, the Fed could shake an already fragile situation, which could ultimately lead to a deeper recession.
The decision was complicated by the fact that it is not yet clear whether the authorities have done enough to save the banking system and how serious the economic shock will be, the newspaper writes.
The Fed on Wednesday revised down its forecast for economic growth this year and next: now it expects the US economy to expand by 0.4% in 2023, not 0.5%, as expected in December, but in 2024 year – by 1.2% against the previously expected 1.6%. The inflation forecast for 2023 was slightly raised: at the end of the year, it is expected at 3.3% instead of 3.1% in the previous forecast.
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