The Federal Reserve continued its efforts to control inflation by raising its key interest rate by a quarter of a percent on Wednesday, despite the potential consequences of higher borrowing rates on the troubled banking system. Fed Chair Jerome Powell held a press conference to assure the public that their deposits are secure and the central bank has the necessary tools to protect them in case of a threat to the economy or financial system.
Powell also emphasized that the Fed is still focused on fighting inflation, which may require further rate hikes, but he also indicated that this may not be necessary if banks reduce their lending to conserve cash, which could slow down growth, hiring, and inflation. The Fed’s latest policy statement shows that they are nearing the end of their rate hike streak and expect to raise their key rate only once more, but Powell warned that additional hikes may still be necessary if inflation remains elevated.
Powell acknowledged that recent events in the banking sector may result in tighter credit conditions and could have an impact on the Fed’s plans for interest rates, but he declared the overall banking system secure. The Fed chair also promised not to involve himself in the central bank’s investigation into the supervision and regulatory failures regarding Silicon Valley Bank.
The latest policy decision reflects a shift in the Fed’s approach, as the current level of their benchmark short-term rate is now the highest in 16 years, leading to higher costs for loans and increasing the risk of a recession. Other central banks, such as the Bank of England and the European Central Bank, are also facing similar challenges in controlling inflation while maintaining financial stability.
Despite recent events in the banking sector, the latest data still shows a solid economy and strong hiring in the United States, with employers adding 311,000 jobs in February. The Fed predicts that the unemployment rate will increase to 4.5% by the end of the year.