Wednesday was the ninth consecutive time that interest rates have been increased by the Federal Reserve. Despite the difficulty in the banking sector created by the failure of two regional banks, they did this to keep combating excessive inflation. All of the Fed’s policymakers agreed that the benchmark rate of interest should be raised by one-quarter point, to 4.875%. People will pay extra for things like vehicle loans and credit card balances as a result of this.
Some on the Federal Reserve’s rate-setting committee believe an increase in interest rates is necessary to maintain price stability. New forecasts released on Wednesday indicate that rates would rise by an average of 0.25% by the close of the year. Federal Reserve officials said in a statement, “The Committee’s thinks that some further tightening of policies may be in order.”
The bank failures had triggered a warning
In light of the recent collapse of Silicon Valley Banks and Signature Bank, which occurred earlier this month, some economic experts had urged the central bank to pause its interest rate increases. However, things appeared to be improving in the banking sector in recent days. On Tuesday, Janet Yellen, the secretary of the Treasury, indicated that large withdrawals from local financial institutions have “stabilized.”
The Fed said in its fiscal policy statement, “The U.S. banking infrastructure is robust and stable.”
However, consumer costs are rising at a rapid pace. The annual inflation rate was 6% in February. Although this was over the Fed’s target of 2%, it was down from 9.1% in June of previous year. The Fed is particularly concerned about the rising prices of services like airline tickets and television subscriptions.
After the meeting, Fed president Jerome Powell told reporters, “My colleagues and I are very conscious that rising prices hurts people’s ability to buy items, especially those who have the least willing to pay more for basics like housing, food, and transportation.”
The Federal Reserve Is Under Fire from Bank Failures
The Federal Reserve is also under scrutiny for its role in supervising the two collapsed banks. There have been rumors for a long time that the Federal Reserve found fault with Silicon Valley Bank’s risk management practices. A large number of customers attempted to withdraw their funds from the California bank, but the issues were not resolved and the bank had to be seized by the U.S. government.
Fed Vice Chairman for Inspection Michael Barr: “We need to be modest and do an extensive and thorough examination of how we monitored and regulated this firm.”
Barr is conducting the research, and he promised to provide his findings by May 1. Next week, he’ll also address two Congressional committees. A third-party probe into the Federal Reserve’s role in the banking crisis has been requested by several. To reporters on Wednesday, Powell said, “It’s a 100% certain thing there’s will be independent investigations.” We have no problem with the traditional procedure of investigating a failed bank.
Both Democratic Senator Elizabeth Warren of Massachusetts and Republican Governor Rick Scott of Florida have proposed that the Fed’s current inspector general be substituted by an external inspector appointed by the president.
Banking turmoil has increased concerns of a recession
The Federal Reserve will have to consider the impact of the collapse of both of the regional banks on the economy when deciding how much to increase rates of interest in the future.
Other financial institutions will likely be more selective in making loans following the collapse of Silicon Valley Banks and Signature Bank. The Federal Reserve warned that “recent actions are likely making it tougher for individuals and companies to get credit,” which would have negative effects on economic activity, employment, and inflation. The magnitude of these consequences is unclear.
When credit becomes more expensive to obtain, like when rates of interest rise, economic expansion slows. According to Nationwide’s senior economist Kathy Bostjancic, “Credit is the fuel that enables small enterprises and the country’s economy run.”
She warned that a significant drop could occur if access to the credit was suddenly revoked. That may aid the Fed’s efforts to maintain price stability. However, it also increases the probability that a recession would hit the country.
Officials at the Fed, though, do not anticipate a slowdown. On Wednesday, members of the price-setting committee projected annual economic growth of 0.4%. They anticipate that the unemployment rate will increase from February’s 3.6% to March’s 4.5%.
