The Federal Reserve on Wednesday raised interest rates by 0.25 percent, citing concerns over inflation and asserting that the crisis-hit banking sector was strong, sound, resilient and well-capitalised. This move has resulted in the current interest rate being set at 5 percent, the highest level seen since June 2006.
However, the Federal Reserve said that additional rate increases “may be appropriate”, indicating that there could still be a possibility of further rate hikes in the future.
The Federal Open Market Committee in a statement said that as there was growth in spending and production and jobs, inflation remained high.
Targeting maximum employment and inflation at the rate of 2 percent over the longer run, it said: “The Committee 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 percent over time,” and hiked the interest rate by 25 basis points.
Despite the banking crisis that caused several small banks to collapse — said to be partly because of the rate hikes — the FOMC said 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,” it said.
The Committee also said that it will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans.
Jerome Powell on banking crisis
On the banking crisis, Fed Chairman Jerome Powell in a presser noted that serious difficulties at small number of banks have emerged in past two weeks.
"History has shown that if isolated banking problems are left unaddressed, it can undermine confidence in healthy banks and threaten the banking system as a whole," he said, and added that the Treasury and FDIC have taken decisive action which assure that depositors' savings in banks are safe.
The Fed's Long Term Lending Programme will provide liquidity and the Fed will work to prevent such incidents from happening again, he said.
Powell warned that the central bank still has some distance to cover as it tries to bring down inflation to its longer-run goal.
“The process of getting inflation back down to 2 percent has a long way to go and is likely to be bumpy,” the central bank leader said at his post-meeting news conference.
“Inflation has moderated somewhat since the middle of last year, but the strength of these recent readings indicates that inflation pressures continue to run high,” Powell said.
Powell said he doesn't see the possibility of smaller regional banks, which hold a disproportionately high amount of loans in real estate, to go the SVB way.
He also said that the Fed was open to an indepenedent probe into the banking crisis, and said that it is likely that this would happen.
On Wednesday, the U.S. dollar experienced a decline in value after the Federal Reserve's announcement of a raised interest rate.
The dollar index decreased by 0.465 percent to 102.680, while the euro increased by 0.62 percent to $1.0834. The Japanese yen weakened by 0.43 percent the greenback at 131.88 per dollar. Meanwhile, the British pound was trading at $1.2288, up by 0.57 percent during the day.
(Edited by : Pradeep John)
First Published: Mar 22, 2023 11:39 PM IST
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