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Amid banking crisis, Fed Chair Jerome Powell decides against relaxing monetary policies

Fed chair Jerome Powell has now called SVB an outlier that had failed badly.

With investors and markets on edge because of the ongoing banking crisis, the worst since the 2007-08 meltdowns, along with break necking inflation, the US Federal Reserve decided to continue fighting price rises and announced another hike in its benchmark interest rates.

The US central bank’s benchmark interest rate will now rise by another quarter of a percentage point to a range of 4.75% to 5%, its ninth consecutive rate rise since 2022 and the highest rate since 2007.

Justifying its move, the Fed said the impact of the banking crisis was “uncertain” but inflation “remains elevated”.

Fed chair Jerome Powell informed the media that the Fed had considered pausing rates in the days running up to the decision but had concluded that the financial sector crisis was under control and that more rate rises were needed to cool down inflation.

“We are committed to restoring price stability and all of the evidence says that the public has confidence that we will do so,” he said.

“It’s important that we sustain that confidence with our actions as well as our words,” he remarked.

The latest rate increase was, however, smaller than the half-point increase that some had expected earlier.

The CME FedWatch tool showed the markets preparing for a possible 0.25-point increase.

In contrast, Goldman Sachs stated in a report that given the turmoil in the banking industry, the Fed Reserve may decide to hold off on tightening monetary policy.

Fed Leader On Banking Crisis

With the failure of two US banks, Silicon Valley Bank and Signature Bank, and the bailout of First Republic and Credit Suisse, the world financial markets have been on edge.

The recent upheaval has drawn attention to high-interest rates; analysts claimed that the Fed’s effort to rein in rising prices has resulted in volatility in the banking industry. SVB had reportedly poured deposits into long-term securities whose value had fallen as interest rates rose. This followed spooked depositors going into a withdrawing rush from the bank, which ultimately accelerated the latter’s demise.

“The crisis of trust in Credit Suisse and the failure of two major US banks have validated the fears of contagion across the global banking system,” Vijay Valecha, CIO of Century Financial, told Zawya.

He pointed out that the European Central Bank, the Bank of England, the Bank of Japan, and the Federal Reserve have all announced coordinated steps to enhance liquidity provisions through daily currency swaps. However, he claimed that the interventions show the “present sensitive scenario”.

However, Fed chair Jerome Powell has now called SVB an “outlier” that had “failed badly”.

While claiming that the US banking system is still “sound and resilient”, Federal Reserve added that the recent stress in the sector was “likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation”.

Jerome Powell also said that while recent stress on the US banking system has added uncertainty to the sector’s outlook, the overall economic scenario may not face a sharp downturn as the Federal Reserve continues its fight against the inflation menace.

“There’s a pathway to that, and that path still exists,” Jerome Powell said, while talking about the chances of a soft landing for the United States economy.

Fed officials also projected the unemployment rate in the domestic market would remain at 4.5% by 2023 end, slightly below the 4.6% seen in projections issued in December 2022. The outlook for economic growth also fell to 0.4% from 0.5% in the previous projections. Inflation is now seen ending the year at 3.3%, compared to 3.1% stated in the last projections.

In the UK, inflation hit an annual rate of 10.4% in February 2023. The Bank of England is expected to raise rates again. The European Central Bank has already raised rates by 0.5 percentage points amid the ongoing banking crisis.

Inflation in the eurozone is averaging 8.5% and was likely to remain high “for too long” without continued rises, ECB stated.

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