Federal Reserve raises 0.25% interest rate amid global banking crisis - Key takeaways
Federal Reserve raises 0.25% interest rate amid global banking crisis - Key takeaways
In its most recent policy announcement on Wednesday, 22 March, the US Federal Reserve chose to raise interest rates by 0.25 per cent. Currently, the federal funds rate ranges from 4.75 per cent to 5 per cent. But, the Fed also made a case for delaying additional rate increases in light of the recent volatility in the financial sector caused by the demise of two banks.
After a series of historic collapses and rescues of lenders in the U.S. and overseas, Fed officials warned that “recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation.” That means potentially higher borrowing costs for home and car loans to steeper credit card interest rates.
Post this announcement, the markets nosedived. The Dow Jones Industrial Average closed around 1.6 per cent down or over 500 points. The S&P 500 and NASDAQ indices were also down and closed the day at about 1.6 per cent lower each.
“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 upheaval stemming from the fall of two major banks is “likely to result in tighter credit conditions” and “weigh on economic activity, hiring and inflation.”
Powell appears to be confident that the Fed can handle a dual challenge: lowering still-high inflation through higher loan rates while calming financial instability through emergency lending programmes and the Biden administration's decision to cover uninsured deposits at the two failed banks. This was the Fed's ninth rate increase since March 2022.
Financial markets may be soothed by the Fed's indication that the rate-hiking campaign is nearing its conclusion as they process the fallout from the banking crisis and the weekend purchase of Credit Suisse by its larger competitor UBS.
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