The Federal Reserve raised interest rates for the ninth time in a row on Wednesday, continuing its campaign against high inflation, despite stress in the banking industry following the collapse of two regional banks.
Fed policymakers voted unanimously to raise their benchmark interest rate by a quarter of a percentage point to just under 5%. This move will make it more expensive for people seeking car loans or carrying a balance on their credit cards.
The Fed believes slightly higher rates may be necessary to restore price stability.
On average, policymakers anticipate rates climbing by another quarter-percentage point by the end of this year, according to new projections that were also released on Wednesday.
In this article, we will explore how the banking turmoil could affect you and how the Federal Reserve is responding to the current economic climate.
Table of Contents
Banking collapses had set off alarm
Following the collapse of Silicon Valley Bank and Signature Bank earlier this month, some observers had urged the central bank to pause its rate hikes temporarily to assess the fallout.
However, the stress in the banking system appeared to ease in recent days. Treasury Secretary Janet Yellen said on Tuesday that large withdrawals from regional banks have stabilized.
Despite this, the Fed’s monetary policy statement said, “The U.S. banking system is sound and resilient.”
Rising Consumer Prices
Consumer prices continue to climb at a rapid rate, with annual inflation at 6% in February. This figure has decreased from 9.1% last June but still significantly exceeds the Fed’s target of 2%.
The central bank is particularly concerned about the rising cost of services, such as airline tickets and streaming TV subscriptions.
The Hardship of High Inflation
The Fed’s chairman, Jerome Powell, told reporters during his news conference after the meeting that high inflation imposes significant hardship as it erodes purchasing power, especially for those least able to meet the higher cost of essentials like food, housing, and transportation.
The Fed believes that slightly higher rates may be necessary to restore price stability.
The Fed Is Under Scrutiny Over Bank Collapses
The Fed is also facing scrutiny for its oversight of the two failed banks.
Fed supervisors reportedly identified problems with Silicon Valley Bank’s risk-management practices years ago, but the problems were not corrected, and the California lender had to be taken over by the U.S. government after suffering a massive bank run.
The Fed will need to weigh the impact of the collapse of the two regional lenders in deciding how much to raise interest rates going forward.
Since the collapse of Silicon Valley Bank and Signature Bank, other banks are expected to be more conservative about making loans. Tighter credit conditions, like rising interest rates, lead to slower economic growth.
How the Banking Turmoil Could Affect You
Here are five ways that the banking turmoil could affect you:
- Higher Interest Rates: As mentioned earlier, interest rates will increase, and borrowing will become more expensive.
- Tighter Credit Conditions: Banks may become more cautious about making loans, making it more difficult for consumers to access credit.
- Possible Economic Slowdown: The collapse of the two regional lenders could lead to a recession if other banks start to follow suit.
- Rising Prices: The Fed is concerned about rising consumer prices, and if they continue to increase, it will be more challenging for consumers to make ends meet.
- Loss of Deposits: Depositors at smaller banks may be at risk if the bank fails.
The Federal Reserve has raised interest rates for the ninth time in a row, and it seems that they may need to continue doing so to restore price stability.
In the midst of banking turmoil following the collapse of two regional banks, the Federal Reserve remains committed to its campaign against high inflation.
The decision to raise interest rates for the ninth consecutive time may make borrowing more expensive for consumers seeking car loans or carrying a balance on their credit cards.
While the stress in the banking system appears to have eased, the Fed is under scrutiny for its oversight of the failed banks. The collapse of these lenders could also lead to tighter credit conditions, a possible economic slowdown, and a loss of deposits for some depositors.
The Fed’s decision to raise interest rates will continue to be closely watched as the economic climate evolves.