The US Federal Reserve raises policy rates despite the banking crisis – here are the reasons

The US Federal Reserve remains on track. The Federal Reserve’s monetary policy committee raised interest rates by 0.25 points to 5 percent on Wednesday. The decision was unanimous, Fed Chairman Jerome Powell announced at a press conference following a two-day meeting.

The currency guards therefore opted for the proverbial golden mean. Powell admitted that a 0.5 point increase in the Federal Funds Rate would have been appropriate given still high inflation.

The current developments in the banking crisis in the live ticker:

Financial market is “stable and robust”

The US Federal Reserve is legally obligated to ensure price stability in the largest economy. However, the Federal Reserve is currently a long way from this goal; in February, CPI rose 6 percent year-on-year, four points above the Fed’s target range.

On the other hand, the rather buoyant interest rate policy of the Federal Reserve – up to and including Wednesday, the base rate had already been raised eight times in a row – caused turmoil in the US financial market. The collapse of the California institution Silicon Valley Bank can also be justified with the interest rate risk. (The medium-sized institution made a blunder when it invested client money in long-dated government bonds.)

In the eyes of monetary authorities, the Silicon Valley Bank, which collapsed ten days ago, is a special case. The collapse of the institution was unprecedented, Powell indicated. Unlike the Silicon Valley Bank, the US financial system is “stable and robust,” the Fed chief assured on Wednesday. The Federal Reserve therefore did not consider it necessary to suspend rate hikes. (Cutting the policy rate was never an option.)

Referring to current data, the Fed boss also assured that the mini-panic in the US banking sector had subsided. Small and medium-sized institutions have thus succeeded in halting the outflow of client funds.

Impact of the banking panic on the economy still open

However, Powell also admitted that the central bank cannot currently estimate what effects the past few days will have on the US economy. “It’s hard for me to see that they’ve been helpful,” he said, but it’s “too early” to make any predictions at this point. He also speculated that there could now be a credit crunch.

The Fed chairman also pointed out that the labor market is still unbalanced. (The unemployment rate is 3.6 percent and employers are finding it difficult to fill vacancies.) Overall, however, economic data is still very good – much to the surprise of many economists, who have actually long been predicting a recession.

The financial markets followed the statements of the Fed chief very closely. However, a look at the major stock market indices revealed that traders were initially not clear on Powell’s message. The Dow index on the New York Stock Exchange initially reacted positively to the rate hike; however, during the press conference of the chairman of the Fed, sentiment turned and the index was in the red. (aargauerzeitung.ch)