Voice of America
23 Mar 2023, 02:35 GMT+10
WASHINGTON - The Federal Reserve extended its year-long fight against high inflation Wednesday by raising its key interest rate by a quarter-point despite concerns that higher borrowing rates could worsen the turmoil that has gripped the banking system.
'The U.S. banking system is sound and resilient,' the Fed said in a statement after its latest policy meeting ended.
At the same time, the Fed warned that the financial upheaval stemming from the collapse of two major banks is 'likely to result in tighter credit conditions' and 'weigh on economic activity, hiring and inflation.'
The central bank also signaled that it's likely nearing the end of its aggressive streak of rate hikes. In a statement, it removed language that had previously indicated it would keep raising rates at upcoming meetings. The statement now says 'some additional policy firming may be appropriate' - a weaker commitment to future hikes.
And in a series of quarterly projections, the policymakers forecast that they expect to raise their key rate just one more time - from its new level Wednesday of about 4.9% to 5.1%, the same peak level they had projected in December.
Still, in its latest statement, the Fed included some language indicating its inflation fight remains far from complete. It said hiring is 'running at a robust pace' and noted that 'inflation remains elevated.'
It removed a phrase - 'inflation has eased somewhat' - it had included in its previous statement in February.
Speaking at a news conference, Chair Jerome Powell said, 'The process of getting inflation back down to 2% has a long way to go and is likely to be bumpy.'
The latest rate hike suggests that Powell is confident the Fed can manage a dual challenge: Cool still-high inflation through higher loan rates, while defusing turmoil in the banking sector through emergency lending programs and the Biden administration's decision to cover uninsured deposits at the two failed banks.
The Fed's signal that the end of its rate-hiking campaign is in sight may also soothe financial markets as they digest the consequences of the U.S. banking turmoil and the takeover last weekend of Credit Suisse by its larger rival UBS.
The central bank's benchmark short-term rate has now reached its highest level in 16 years. The new level likely will lead to higher costs for many loans, from mortgages and auto purchases to credit cards and corporate borrowing. The succession of Fed rate hikes also has heightened the risk of a recession.
The Fed's new policy decision reflects an abrupt shift. Early this month, Powell had told a Senate panel that the Fed was considering raising its rate by a substantial half-point. At the time, hiring and consumer spending had strengthened more than expected, and inflation data had been revised higher.
The troubles that suddenly erupted in the banking sector two weeks ago likely led to the Fed's decision to raise its benchmark rate by a quarter-point rather than a half-point. Some economists have cautioned that even a modest quarter-point rise in the Fed's key rate, on top of its previous hikes, could imperil weaker banks whose nervous customers may decide to withdraw significant deposits.
Silicon Valley Bank and Signature Bank were both brought down, indirectly, by higher rates, which pummeled the value of the Treasurys and other bonds they owned. As anxious depositors withdrew their money en masse, the banks had to sell the bonds at a loss to pay the depositors. They couldn't raise enough cash to do so.
After the fall of the two banks, Credit Suisse was taken over by UBS. Another struggling bank, First Republic, has received large deposits from its rivals in a show of support, though its share price plunged Monday before stabilizing.
The Fed is deciding, in effect, to treat inflation and financial turmoil as two separate problems, to be managed simultaneously by separate tools: Higher rates to address inflation and greater Fed lending to banks to calm financial turmoil.
Get a daily dose of Mexico Star news through our daily email, its complimentary and keeps you fully up to date with world and business news as well.
Publish news of your business, community or sports group, personnel appointments, major event and more by submitting a news release to Mexico Star.
More InformationNEW DELHI, India: Birkenstock is stepping up its efforts to protect its iconic sandals in India, as local legal representatives conducted...
Washington DC [US], July 11 (ANI): The response to the April 22 Pahalgam attack reflects a significant shift in India's counterterrorism...
Bengaluru (Karnataka) [India] July 11 (ANI): In the wake of widespread concern expressed in the public and media about the recent increase...
Bengaluru (Karnataka) [India], July 11 (ANI): Karnataka Deputy Chief Minister DK Shivakumar, on the occasion of World Population Day...
COLOMBO, July 11 (Xinhua) -- The cool water, accompanied by a gentle sea breeze, blew away the summer heat in Galle, Sri Lanka, inviting...
Fuel is only one of so many problems when death, destruction and displacement are being reported daily, as hopes for a possible ceasefire...
LONDON, U.K.: At least 13 people are believed to have taken their own lives as a result of the U.K.'s Post Office scandal, in which...
WASHINGTON, D.C.: Travelers at U.S. airports will no longer need to remove their shoes during security screenings, Department of Homeland...
WASHINGTON, D.C.: An elaborate impersonation scheme involving artificial intelligence targeted senior U.S. and foreign officials in...
SLUBICE, Poland: Poland reinstated border controls with Germany and Lithuania on July 7, following Germany's earlier reintroduction...
WASHINGTON, D.C.: After months of warnings from former federal officials and weather experts, the deadly flash floods that struck the...
MOSCOW, Russia: Just hours after his sudden dismissal by President Vladimir Putin, Russia's former transport minister, Roman Starovoit,...