Despite the financial crisis affecting American regional banks, the Federal Reserve (Fed), the American central bank, raised its rates by a quarter of a point on Wednesday 22 March. They are now between 4.75% and 5%, their highest level since 2007. This is the ninth consecutive increase in a year, when the Fed recognized that inflation was not ” provisional ” and had abandoned the free money policy that had prevailed since the Covid-19 pandemic.
At the beginning of March, the president of the institution, Jerome Powell had hinted that he would increase his rates by half a point, due to persistent inflation (6% at an annual rate). The banking crisis led to the interim decision.
Mr. Powell began his opening remarks on bank failures, including that of the Silicon Valley Bank, by explaining that the financial system was sound and that his bank would intervene once more to protect savers if necessary. “Basically, the management of Silicon Valley Bank has seriously failed”Mr Powell said, accusing him of taking interest rate and liquidity risks “important” : “We are committed to learning from this episode and working to prevent events like this from happening once more,” he added, while the bank did not take the necessary corrective measures despite multiple interventions by the San Francisco Fed.
Financial security assured
This statement was not intended to explain that the fight once morest inflation should be put on hold to avoid the financial crisis. On the contrary, Mr. Powell sought to uncorrelate the two subjects and to explain that financial security being assured, the bank might continue its fight to bring inflation down to 2%. Mr Powell assumed the term “disinflation”, pronounced during his previous press conference but remains worried regarding the rise in prices in services excluding housing, fueled by the shortage of labour.
This diagnosis does not mean that the banking crisis will not have an effect on the economy, on the contrary. Mr. Powell felt it was going to have an effect ” equivalent “ to a rate hike of at least a quarter point. “Recent developments should translate into tighter credit conditions for households and businesses and weigh on economic activity, hiring and inflation”, says the Fed in its press release. Clearly, a banking crisis plus a 0.25 point hike has an effect at least as restrictive on the economy as the half-point hike initially forecast. “The Fed raised rates, and so did Silicon Valley Bank,” summarizes the Wall Street Journal.
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