The Federal Reserve will raise its key interest rate by 0.25 percent, continuing its fight against inflation despite continued shakiness of financial markets following a series historic bank collapses.
This is the ninth consecutive increase in the key federal funds rate by the central bank over the last year. However, Fed officials expressed more caution about whether they would impose additional interest-rate increases down the line.
In a statement Wednesday, Fed officials stated that they “will closely watch incoming information and evaluate the implications for monetary policies.” To bring down consumer price rises to the 2% target, the Committee believes that additional policy firming may be necessary. This statement reaffirms previous language that indicated a possibility of “ongoing rises.”
For clues on how the Fed views its role in the storm, all eyes will now be on Fed Chair Jerome Powell . He is scheduled to make remarks at 2:30 PM ET .
The Fed will also release its quarterly round economic projections Wednesday. This will include forecasts by policymakers on inflation and rate increases through 2025.
For February , the latest 12-month inflation data was at 6%. This was slightly lower than January’s 6.4% level, and down from a peak of 9% last summer. However, it is still well above the Fed’s 2% target. It shows that consumers are still feeling price pain despite steady declines.
The Fed’s more specific inflation measure, supercore inflation, is what the Fed has been monitoring. This reflects price increases due to everyday services costs such as haircuts and meals out. even increased slightly last month which led many analysts to expect further rate increases over the coming week.
However, the collapses at Silicon Valley Bank and Signature Bank were followed by a rush to shore up the finances of Credit Suisse, First Republic and other banks.
This is partly due to the fact that the Fed’s actions to curb inflation were seen as contributing factors in the bank meltdowns. Although the problems that caused the bank meltdowns were different for each lender, higher interest rates had placed pressure on them both as has the entire financial industry.
The Fed raises its key federal funds rate. This causes a chain reaction in which other areas of the economy experience rate increases. It makes it more costly to borrow money and invests, and cools the demand for goods.
This is exactly what the central bank wants in its fight against inflation. The Fed raised its effective rate from nearly zero one year ago to over 4.5% today. Consumers now face higher borrowing costs due to eight consecutive increases. These range from auto loan rates of 6.5% to credit card interest rates that are nearly 20% to auto loans rates that are about 6.5%.
“They’re saying, We have to balance that inflation fight versus banking system and adding stress in an already stressed systems,'” Michael Antonelli of Robert W. Baird & Co., the managing director of Robert W. Baird & Co. financial service group said earlier this week to Fed officials. It’s not an easy task for them right now.
