The US Federal Reserve raises interest rates by 0.25 percentage points

Denver, Washington Despite the most recent bank tremor, the US Federal Reserve will not be dissuaded from raising interest rates. It raised the key rate by a quarter of a percentage point on Wednesday – to the new range of 4.75 to 5.0 percent. At the beginning of 2022 it was still close to zero.

The markets initially reacted positively. The leading index Dow Jones, the broad S&P 500 and the tech-heavy Nasdaq rose immediately after the decision, but then turned negative during Fed Chair Jerome Powell’s press conference.

“We considered a rate pause in the days leading up to the meeting,” Powell conceded Wednesday. But with inflation higher and the labor market stronger than expected, monetary policymakers decided to stay the course.

The central bankers left the further steps open. More rate hikes “might be appropriate,” Powell said. For investors, this is a welcome signal that the Fed could soon be finished with its rate hikes. Some economists reckon that this could already have been the last rate hike in this cycle.

“The US banking system remains stable and resilient”

With a view to the banking crisis of the past few weeks, monetary policymakers emphasized: “The US banking system remains stable and resilient.” However, the most recent developments could lead to more difficult credit conditions for households and companies.

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That could also weigh on economic growth and jobs, and lower inflation, Powell said. The exact effects “are still unclear.” It is therefore important that the Fed retains the necessary flexibility. If it becomes more difficult to get credit, that would have a similar effect as further rate hikes. It could therefore be that the Fed no longer has to do as much with its interest rate policy.

At the same time, the most powerful central bank in the world is keen to provide the banks with sufficient liquidity to further stabilize the financial system. A new program was set up shortly after the SVB bankruptcy and it’s having an impact, Powell said. Bank customers would no longer transfer their credit balances to larger institutions on a large scale, as they did a few days ago. Big banks are more tightly regulated in the US and may be better able to absorb turbulence.

“The Fed has followed the lead of the European Central Bank,” said Brian Coulton, chief economist at rating agency Fitch. She has signaled that her interest rate policy is fighting inflation “while at the same time using accounting tools to minimize risks to financial stability.” Investors should not prematurely assume that the central bank has come to the end of its rate hikes.

The Fed, which is a key banking regulator, also braced institutions for further changes. The causes of the SVB bankruptcy were still being examined in detail. The results are to be presented on May 1st. But “it’s clear that we need to strengthen oversight and regulation,” Powell said. Above all, the speed with which the bank run on the SVB took place is unique. It was made possible by the proliferation of online and mobile banking. Therefore, the regulatory provisions would have to be adapted accordingly.

The Fed’s report focuses primarily on the question of how the SVB went bankrupt, even though the Fed’s regulators have been pointing out errors in risk management for years and have repeatedly warned the bank.

The Fed also released its new economic projections on Wednesday, which go through the end of 2025. In these non-binding indications, known as the “dot plot”, the central bankers continue to assume that the key interest rate will reach a high of 5 to 5.25 percent. Two weeks ago, Powell indicated before the US Congress that this maximum rate would have to be increased further.

We considered a rate pause in the days leading up to the meeting. Fed Chair Jerome Powell

Powell stressed that economic growth could come under pressure. However, inflation is “still too high and the labor market is very strong”. The Fed remains intent on bringing inflation back to the 2 percent target. Inflation would continue to move in the right direction, albeit more slowly than hoped.

US regional banks under pressure

The trigger for the crisis at the beginning of March was the liquidation of the US financial group Silvergate Capital, which is geared towards the crypto industry. A few days later, the US money house Silicon Valley Bank, which specializes in start-up financing, was placed under the control of the US deposit insurance company FDIC and closed. The closure of Signature Bank and a coordinated rescue operation for the regional bank First Republic in the USA followed.

Investors were again concerned about the situation of the regional banks on Wednesday. The California institute Pacwest has lost 20 percent of its deposits since the beginning of the year, the bank said. The papers of the First Republic were also under pressure again.

Statements by US Treasury Secretary Janet Yellen on the subject of deposit insurance also caused additional uncertainty. At the same time, she told Powell in a separate press conference that the government was not considering guaranteeing all deposits in the United States. Currently bank balances are only insured up to $250,000 per customer per bank. Powell, on the other hand, emphasized that the extraordinary support measures by the Fed and other regulators made it clear that deposits in the US banking system were safe. “That irritated investors,” said Josh Brown, CEO of wealth manager Ritholtz, on CNBC.

The Fed faces a major challenge

In Europe, the major Swiss bank Credit Suisse last week get serious problems. After numerous scandals, criticism of poor risk management and cash outflows in the three-digit billion range, the bank had its back to the wall at the weekend. The share price had crashed despite liquidity promises. In order to prevent a conflagration and a global financial crisis in view of the nervousness in the banking industry, the government and supervisory authorities pushed the competitor UBS to take over.

The challenge for the Fed’s central bankers now is to show that they take the turbulence in the banking sector seriously – while at the same time not letting up in the fight against high consumer prices. High inflation in the USA is continuing to weaken. In February, US consumer prices rose 6.0 percent year-on-year – the lowest increase since September 2021. However, the figure is still far from the target inflation rate of 2 percent on average.

Despite the uncertainty in the banking sector, the European Central Bank (ECB) raised the key interest rate significantly by 0.5 percentage points to 3.5 percent last week.

With agency material

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