The Fed raises interest rates by a quarter point

(CNN) — The United States Federal Reserve raised interest rates by a quarter of a point on Wednesday, in a new move to try to keep inflation at bay.

Investors and economists had widely anticipated a quarter point rise, or even a pause, amid the collapse of the banking sector.

Before the decision, there were different scenarios that the Fed could set: continue with its aggressive campaign of interest rate hikes to cool inflation that triples the central bank’s target of 2%; take some time to assess how this campaign has affected the banking system; or split the difference and raise rates by 0.25% to show their commitment to both the fight against inflation and the stability of the financial system.

Instead of raising rates for longer, some economists even forecast cuts at the end of the year if the banking crisis triggers a recession.

Still, Federal Reserve Chairman Jerome Powell and policymakers entered their second policymaking meeting of the year surrounded by an unusual level of uncertainty as the landscape surrounding the financial system continues to change.

The central bank’s mission to fight inflation has become much more difficult in recent weeks, as the collapse of several banks meant the Fed had to balance a potential financial crisis alongside high inflation and a tight job market.

In a statement issued at the end of the meeting, Fed officials acknowledged that the recent turbulence in financial markets is affecting inflation and the economy, while expressing confidence in the system as a whole.

“The US banking system is strong and resilient,” they wrote in their policy statement on Wednesday. “Recent developments are likely to result in tighter credit conditions for households and businesses and weigh on economic activity, hiring and inflation. The extent of these effects is uncertain.”

The Committee, they said, “remains very attentive to inflation risks.”

The banking chaos has stoked fears not only that the central bank could overcorrect the economy into recession but could trigger more bank failures, and leading economists have urged the Fed to halt rate hikes.

That’s partly because rate hikes have undermined the value of Treasuries and other securities, a critical source of capital for most US banks. When Silicon Valley Bank was forced to sell those bonds quickly at a substantial loss, the bank entered a liquidity crisis and collapsed.

“The Fed is in a bit of a bind,” former New York Fed President Bill Dudley told CNN. “On the one hand, they should continue to tighten because inflation is still too high and the labor market is too tight. On the other hand, they want to make sure that they do nothing to exacerbate the pressure on the banking system,” he said. “There really is no one correct solution.”

Nine consecutive rate hikes

Still, the politicians made their decision and raised rates for the ninth time in a row. They raised overnight lending rates to a range of 4.75% to 5%, their highest level since September 2007. That sends a clear message that restoring price stability remains a priority.

The decision to raise rates by a quarter of a point was unanimous. No politician has voted against a decision since June of last year.

Policymakers also released their rate projections for the first time since December.

The projections fell largely in line with earlier forecasts. The Federal Reserve still expects to bring interest rates to 5.1% by the end of 2023, which means they expect an additional quarter-point rate hike before going on pause.

However, officials indicated that interest rates are likely to stay higher for longer as they raised their projected federal funds rate to 4.3% from 4.1% in 2024.

In March, Powell indicated that interest rates could go up and stay there for longer than expected, but current financial conditions may indicate less of a need to keep rates higher to cool the economy and reduce inflation.

Fed officials now project deeper cuts to the economy over the next two years.

Real GDP, a widely used measure of the economy, is forecast to grow 0.4% this year, down from previous projections of 0.5%. In 2024, officials project the economy will grow 1.2%, a cut from the 1.6% they projected in December.

Fed policymakers also forecast unemployment to fall below expectations by the end of the year, to 4.5%, from 4.6% projected in December.

Meanwhile, inflation could remain higher than expected, and Fed officials project that PCE inflation, their preferred gauge, could rise to 3.3% this year from 3.1% previously forecast.

“Our banking system is strong,” Powell said.

Fed Chairman Jerome Powell tried to reassure the world that America’s banks are generally healthy.

“Our banking system is strong and resilient with strong capital and liquidity,” he told a news conference on Wednesday. “We will continue to closely monitor conditions in the banking system and stand ready to use all of our tools as necessary to keep it safe and sound.”

“In the last two weeks, serious difficulties have arisen in a small number of banks,” he said. “History has shown that isolated banking problems, if left unaddressed, can undermine confidence in healthy banks and threaten the ability of the banking system as a whole to play its vital role in supporting the savings and credit needs of homes and businesses.

Powell said that threat is why US regulators worked to restore confidence by extending emergency lending to banks and increasing the availability and flow of dollars around the world. He noted that some banks now have “unusual funding needs” as customers withdraw deposits, and the Fed’s programs have effectively helped banks get the cash they need to stay afloat.

“These actions demonstrate that the savings of all depositors in the banking system are safe,” Powell said. “Our banking system is strong and resilient… We are committed to learning the lessons from this episode and working to prevent episodes, events like this, from happening again.”

This report was made with information from Nicole Goodkind and Allison Morrow