Dhe Federal Reserve has raised interest rates by 0.25 percentage points, continuing to tighten monetary policy, even as the United States is experiencing the worst financial crisis since 2008. Interest rates will be raised to between 4.75 and 5 percent. This is the ninth rate hike in a row. With the decision, the US central bank is underscoring its determination to curb inflation. The consumer price index CPI was 6 percent higher in February than a year earlier. “Inflationary pressures remain high,” said Federal Reserve Chairman Jerome Powell.
Against the background of the latest developments, he emphasized that he considers the American banking system to be healthy and robust. Powell justified the support measures after the collapse of two regional banks with the concern that the local crisis would spread into a crisis of confidence.
The Federal Reserve, along with the Treasury Department and deposit insurance, have made it clear that deposits are safe and that there is ample liquidity available for banks. Powell believes that regulation needs to be adjusted to prevent similar crises in the future. He is particularly concerned about the rapid pace with which the run on the banks has taken place. The regulators would have to find an answer to that.
Banks are likely to become more reluctant to lend
But the Fed conceded in the statement released Wednesday after the Federal Open Market Committee’s two-day meeting that America’s financial crisis is likely to make banks more reluctant to lend to households and families. The central bankers expect the crisis to dampen economic growth, inflation and the willingness to hire additional employees.
However, the extent of this effect is highly uncertain. However, this development is helping the central bank’s course, which is aimed at cooling down the economy. Against this background, the Fed is a little more vague than before about future course. The central bankers are now assuming that further tightening may be necessary in order to bring the inflation rate to the desired target of 2 percent.
What is new in the statement is a passage in which the Fed emphasizes that it is prepared to adjust course if new risks emerge that call into question the achievement of the target. This can also be taken as an indication that the Fed is ready to ease monetary policy should the financial crisis spread.
The projections, with which central bankers reflect their expectations for the development of inflation, unemployment, economic growth and key interest rates, remained almost unchanged compared to the December projections. The one exception is that inflation is now rated a tad more persistent. On average, the central bankers expect real growth to stagnate at 0.4 percent this year and increase to 1.4 percent next year.
As a result, the unemployment rate could rise from the current 3.6 percent to 4.5 percent. On the basis of this median scenario, the central bankers calculate that at least one further increase in key interest rates will be necessary. The financial markets are now anticipating interest rate cuts later in the year. Powell made it clear that he thinks that’s unlikely. Bank share prices fell slightly after the monetary policy decisions were announced.
Significant losses on the stock market
After the Federal Reserve’s decision, prices on the New York Stock Exchange reacted with significant losses. The Dow Jones index of standard values closed after only slight losses in the morning trading with a loss of 1.37 percent at 32,030 points. The broader S&P 500 lost even more, slipping 1.65 percent to 3,936 points. The Nasdaq composite index fell 1.6 percent to 11,669 points.