Federal Reserve Increases Key Rate by Another 0.25 Percentage Points
The US Federal Reserve has raised interest rates yet again, despite concerns that such a move could add to financial turmoil after recent bank failures. The Fed increased its key rate by 0.25 percentage points and said that more action could be “appropriate” as consumer prices continue to climb. The move represents the ninth rate rise in a row and signals the Fed’s efforts to slow the economy and ease pressures pushing up prices.
However, critics warn that sharp rate rises have led to strains in the banking system. Two banks, Silicon Valley Bank and Signature Bank, have collapsed this month as a result of problems caused by higher interest rates. Nevertheless, authorities around the world have maintained that they do not think these failures pose a threat to financial stability, and that they will not distract from the efforts to bring inflation under control.
In announcing the decision, the Fed stated that the US banking system remains “sound and resilient”. However, it also acknowledged that banking turmoil could drag on growth, and scaled back earlier statements that higher interest rates were likely to be needed in the months ahead. The Fed has instead stated that “some additional policy firming may be appropriate”.
Despite the interest rate increase, the economy has performed better than anticipated, and prices continue to climb faster than the 2% rate considered healthy. Inflation has jumped 6% in the 12 months to February, with some items, including food and airfare, experiencing even higher surges.
The cost of borrowing money for activities such as buying a home or expanding a business will now increase, causing demand for such activity to potentially fall, thereby cooling prices. This trend is beginning to emerge in the US housing market, where purchases have significantly slowed over the last year and the median sales price in February was lower than it was a year ago – the first decline in more than a decade.
Last week, the European Central Bank raised its key interest rate by 0.5 percentage points, while the Bank of England is due to make its own interest rate decision on Thursday. In light of the bank failures, Federal Reserve chairman Jerome Powell had previously warned that officials might need to raise interest rates more aggressively than expected to bring the situation under control. However, the bank’s forecasts indicate that interest rates will be roughly 5.1% at the end of 2023 – unchanged since December.
Despite some uncertainty regarding the extent of the effects, the Fed has continued to increase interest rates in an effort to bring inflation under control, stating that “some additional policy firming may be appropriate”. This latest interest rate increase marks the highest level since 2007, when the US experienced a major financial crisis.
