The Fed has made a decision on interest rates.
(Photo: AP)
Washington, Denver 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 reacted positively. The leading index Dow Jones, the broad S&P 500 and the technology-heavy Nasdaq rose immediately after the decision.
Although a significant increase in interest rates was still considered likely a few weeks ago, following the collapse of several US banks it was currently unclear which path the Fed would take. In February, the central bank raised its key interest rate by 0.25 percentage points to a range of 4.5 to 4.75 percent.
However, the central bankers left the further course open. Further rate hikes “may be appropriate,” the Fed said in its statement. 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.
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. The exact effects “are not yet clear,” according to the Fed.
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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. This was followed by the closure of Signature Bank and a coordinated rescue effort for another struggling financial institution in the USA.
The Fed faces a major challenge
In Europe, the major Swiss bank Credit Suisse ran into 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) spoke out in favor of a significant increase in the key interest rate by 0.50 percentage points to 3.5 percent last week.
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