The Federal Reserve, the US central bank, has further raised interest rates, despite the turmoil in the US banking sector. This is according to a statement released by the Fed Board on Wednesday evening. Fed Chairman Jerome Powell was expected to comment on the decision at 7:30 p.m. Dutch time.here to follow).
The main Fed interest rate will increase by 0.25 percentage point to a range of between 4.75 and 5 percent. The interest rate hike of 0.25 percentage point is in line with most analysts’ latest expectations. Most Fed board members expect another rate hike of 0.25 percentage point this year, according to estimates released by the central bank on Wednesday. From next year, interest rates will then fall again, according to the forecast.
Expectations up and down
Expectations in the financial markets about Wednesday’s Fed interest rate decision have fluctuated considerably in recent days. When the Fed intervened with the US government earlier this month to compensate account holders of the bankrupt Silicon Valley Bank, many investors still thought that the central bank would stop raising interest rates this month. The sharp rise in interest rates – which were still just above 0 until a year ago – had caused problems for SVB.
On the other hand, more rate hikes by the central bank seemed necessary to cope with the stubborn inflation in the US. Inflation was 6 percent on an annual basis in February, while the Fed aims for 2 percent inflation. Interest rate hikes are the calibrated monetary weapon against inflation. They make borrowing less attractive, which curbs consumption. Ultimately, this should also push down price increases.
The board is “strongly committed to bringing inflation back to its target of 2 percent,” the statement said. In February, the Fed also raised interest rates by 0.25 percentage point, in December by 0.5 percentage point, and before that by 0.75 percentage point several times.
Help from Yellen
The Fed’s decision was made a little easier by statements on Tuesday from Treasury Secretary Janet Yellen. She said in a speech that the federal government is willing to guarantee savings at small and medium-sized banks. This had a calming effect on investors about the fate of these banks. In addition to the Californian SVB, Signature from New York also had to be rescued. After that, First Republic Bank of San Francisco was in dire straits. The latter bank is kept going by large banks, but remains shaky.
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