The Federal Reserve raised interest rates at a ninth straight meeting and indicated there may be more hikes to come in a clear sign it’s confident that its bid to quell inflation won’t deepen a nascent banking crisis.
The Federal Open Market Committee voted unanimously to increase its target for the federal funds rate by a quarter percentage point to a range of 4.75% to 5%, the highest since September 2007, when rates were at their peak on the eve of the financial crisis. It’s the second straight rise of 25 basis points following a string of aggressive moves starting in March 2022, when rates were near zero.
“We are committed to restoring price stability, and all of the evidence says that the public has confidence that we will do so,” Chair Jerome Powell said at a press conference following the Fed’s two-day meeting. “It is important that we sustain that confidence with our actions as well as our words.”
Officials are prepared to raise rates higher if needed, he said.
Treasury yields and the dollar fell as investors bet that Powell’s confidence in the outlook would falter as the fallout from the banking crisis bridled economic activity. Remarks by Treasury Secretary Janet Yellen, speaking at the same time on Capitol Hill, hit banking shares.
“The Fed appears quietly confident the economy won’t be heavily disrupted by recent banking sector woes,”said James Knightley, chief international economist at ING. “We are more pessimistic. Our concern was that this has been the most aggressive monetary policy tightening cycle for 40 years and by going harder and faster into restrictive territory you naturally have less control over the outcome.”
In a reflection of the intense scrutiny that the Fed is currently under, White House Press Secretary Karine Jean-Pierre was asked by reporters if President Joe Biden still had confidence in his Fed chair. She said that he did.
Sound and resilient
Powell, in his press conference, emphasized the U.S. banking system is sound and resilient, reiterating a line in tyhe FOMC’s post-meeting statement, and said the agency is prepared to use all of its tools to maintain stability.
He also acknowledged recent banking turmoil is “likely to result in tighter credit conditions for households and businesses, which would in turn affect economic outcomes,” but added, “It’s too soon to tell how monetary policy should respond.”
Fed policymakers projected rates would end 2023 at about 5.1%, unchanged from their median estimate from the last round of forecasts in December. The median 2024 projection rose to 4.3% from 4.1%.
The hike and forecasts suggest policymakers remain firmly focused on bringing down inflation to their 2% goal, indicating they see rising prices — especially based on recent data — as a bigger growth threat than the bank turmoil. It also projects confidence that the economy and financial system remain healthy enough to withstand the string of bank collapses.
At the same time, rising borrowing costs risk worsening the bank crisis, especially since it was higher interest rates on holdings of Treasuries that precipitated Silicon Valley Bank’s collapse and threatened other lenders. If the Fed is underestimating the extent of financial fissures, the latest move risks adding to pressures that could tip the economy into recession.
Powell said the Fed would welcome an outside investigation into the apparent lapses in oversight of SVB, and that he plans to support stronger bank supervision and regulation if recommended by the Fed’s Vice Chair for Supervision Michael Barr.
‘How did this happen?’
“The question we were all asking ourselves over that first weekend was, ‘How did this happen?’” he said.
The Fed “anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time,” officials said in their post-meeting statement.
Asked about the change in language, Powell said, “Really I would focus on the words ‘may’ and ‘some’.” He stressed that Fed officials don’t expect rate cuts this year.
He also said policy makers considered a pause in their interest-rate hiking campaign in light of the banking turmoil, but the consensus for an increase was strong, citing recent data showing “inflation pressures continue to run high.”
The change in the statement language - policymakers had previously said that “ongoing increases” in the benchmark rate would be appropriate - signals they want to add flexibility to pause if necessary.
The Fed said it would continue the same pace of shrinking its balance sheet, a process known as quantitative tightening, though recent emergency measures have swelled assets once again.
Earlier this month, before the SVB failure, Powell indicated that the Fed might ramp back up to a 50 basis-point hike at this meeting to combat persistent inflation and a too-tight labor market. This week’s gathering was the first for policymakers since the January and February data came in surprisingly hot.
The collapse of SVB and two other banks in the U.S. were followed in Europe by the sale of Swiss banking giant Credit Suisse Group AG.
The turmoil ignited fears of contagion. The Fed and other regulatory agencies introduced backstops, including an emergency lending facility to banks and an increase in the frequency of U.S. dollar swap-line operations with foreign central banks, the latter of which the Fed and five other institutions announced Sunday.
Treasury Secretary Janet Yellen said regulators aren’t looking to provide “blanket” deposit insurance to stabilize the U.S. banking system, and that the heads of recently failed American lender should be held accountable. Powell, for his part, said that all depositors’ savings were safe.
(With assistance from Kristy Scheuble, Liz Capo McCormick, Vince Golle, Jonnelle Marte and Reade Pickert.)
