Bermuda Post

Wednesday, Jun 07, 2023

US raises interest rates despite banking turmoil

US raises interest rates despite banking turmoil

The US central bank has raised interest rates again, despite fears that the move could add to financial turmoil after a string of bank failures.

The Federal Reserve increased its key rate by 0.25 percentage points, calling the banking system "sound and resilient".

But it also warned that fallout from the bank failures may hurt economic growth in the months ahead.

The Fed has been raising borrowing costs in a bid to stabilise prices.

But the sharp increase in interest rates since last year has led to strains in the banking system.

Two US banks - Silicon Valley Bank and Signature Bank - collapsed this month, buckling in part due to problems caused by higher interest rates.

There are concerns about the value of bonds held by banks as rising interest rates may make those bonds less valuable.

Banks tend to hold large portfolios of bonds and as a result are sitting on significant potential losses. Falls in the value of bonds held by banks are not necessarily a problem unless they are forced to sell them.

Authorities around the world have said they do not think the failures threaten widespread financial stability and need to distract from efforts to bring inflation under control.

Last week, the European Central Bank raised its key interest rate by 0.5 percentage points.

The Bank of England is due to make its own interest rate decision on Thursday, a day after official figures showed that inflation unexpectedly shot up in February to 10.4%.

Federal Reserve chairman Jerome Powell said the Fed remained focused on its inflation fight. He described Silicon Valley bank as an "outlier" in an otherwise strong financial system.

But he acknowledged that the recent turmoil was likely to drag on growth, with the full impact still unclear.


Economic impact


Forecasts released by the bank show officials expect the economy to grow just 0.4% this year and 1.2% in 2024, a sharp slowdown from the norm - and less than officials projected in December.

The announcement from the Fed also toned down earlier statements which had said "ongoing" increases in interest rates would be needed in the months ahead.

Instead, the Fed said: "Some additional policy firming may be appropriate".

The moves "signal clearly that the Fed is nervous", said Ian Shepherdson, chief economist at Pantheon Macroeconomics.


Wednesday's rate rise is the ninth in a row by the Fed. It lifts its key interest rate to 4.75%-5%, up from near zero a year ago - the highest level since 2007.

Higher interest rates mean the cost to buy a home, borrow to expand a business or take on other debt goes up.

By making such activity more expensive, the Fed expects demand to fall, cooling prices.

That has started to happen in the US housing market, where purchases have slowed sharply over the last year and the median sales price in February was lower than it was a year ago - the first such decline in more than a decade.

But overall the economy has held up better than expected and prices continue to climb faster than the 2% rate considered healthy.

Inflation, the rate at which prices climb, jumped 6% in the 12 months to February. The cost of some items, including food and airfare, is surging even faster.

Before the bank failures, Mr Powell had warned that officials might need to push interest rates higher than expected to bring the situation under control.

The bank projections show policymakers expect inflation to fall this year - but less than expected a few months ago.

Still, they forecast interest rates of roughly 5.1% at the end of 2023 - unchanged since December - implying the Fed is poised to stop raising rates soon.

Mr Powell described the effect of the recent turmoil as the "equivalent of a rate hike".

He said the Fed may be able raise its key rate less aggressively, if the turmoil in the financial system prompts banks to limit lending, and the economy to slow more quickly.

But he repeated that the Fed would not shy away from its inflation fight.

"We have to bring down inflation down to 2%," he said. "There are real costs to bringing it down to 2% but the costs of failing are much higher."

AI Disclaimer: An advanced artificial intelligence (AI) system generated the content of this page on its own. This innovative technology conducts extensive research from a variety of reliable sources, performs rigorous fact-checking and verification, cleans up and balances biased or manipulated content, and presents a minimal factual summary that is just enough yet essential for you to function as an informed and educated citizen. Please keep in mind, however, that this system is an evolving technology, and as a result, the article may contain accidental inaccuracies or errors. We urge you to help us improve our site by reporting any inaccuracies you find using the "Contact Us" link at the bottom of this page. Your helpful feedback helps us improve our system and deliver more precise content. When you find an article of interest here, please look for the full and extensive coverage of this topic in traditional news sources, as they are written by professional journalists that we try to support, not replace. We appreciate your understanding and assistance.
Newsletter

Related Articles

Bermuda Post
Close
0:00
0:00
Corporations standing up for “LGDP-LGT-LBG-LGBTQ2+ kids” during ‘Pride Month’ be like:
A Major Ukrainian Hydroelectric Dam BLOWN UP
US and European Intelligence Agencies Uncover Evidence of Ukrainian Role in Terror Attack on Nord Stream Pipeline
The driver has been described by authorities as a 21-year-old woman from Tallahassee
Joe Biden falls at the Air Force Graduation
America's Got Talent…
Nvidia Joins Tech Giants as First Chipmaker to Reach $1 Trillion Valuation
Drone Attack on Moscow's Wealthiest Neighborhoods Suspected to be Launched by Ukraine
AI ‘extinction’ should be same priority as nuclear war – experts
Prominent Hacker Forum RaidForums Suffers Substantial Data Breach
Nvidia CEO Huang says firms, individuals without AI expertise will be left behind
WPP Revolutionizes Advertising with NVIDIA's AI Powerhouse
Two US Employees Fired For Chasing Robbers Out Of Store As They Broke ''Company Policy''
If you donated to BLM, you got played
Pfizer, the EU, and disappearing ink - Smoke, Mirrors, and the Billion-Dose Pfizer Vaccine Deal: EU's 'Open Secret
Actor Tom Hanks told Harvard University graduates to be superheroes in their defense of truth and American ideals, and to resist those who twist the truth for their own gain
The Sussexes' Royal Rebound: Could Harry and Meghan Markle Return to the UK?
A provocative study suggests: Left-Wing Extremism and its Unsettling Connection to Psychopathy and Narcissism
France Arrests 10 on Suspicion of Failing to Respond in Time to Migrant Drowning
Neuralink Receives FDA Approval for First-in-Human Clinical Study
Is Saudi Arabia the holiest place in the world? Ancient Hebrew Inscriptions from "The Mount Sinai Stand" Discovered in Saudi Arabia
Ukrainian Intelligence Official Admits to Assassination Attempts on Putin
WATCH THIS: democracy in Russia is so bad!
Ed Davey: It is possible for a woman to have a penis
Bernard Arnault Loses $11.2 Billion in One Day as Investors Fear Slowdown in US Growth Will Reduce Demand for Luxury Products
Russian’s Wagner Group leader: “I am not a chef, I am a butcher. Russia is in danger of a revolution like in 1917.”
TikTok Sues Montana Over Law Banning the App
Ron DeSantis Jumps Into 2024 Presidential Race, Setting Up Showdown With Trump
Steve Jobs introducing Apple's iPhone, exactly 16 years ago.
China overtakes Japan as world's top car exporter
Last Walmart in North Portland Closing Down
Banking Behemoth vs Ex-Boss: The PMorgan-Epstein Entanglement
Florida's DeSantis seeks to disqualify judge in Disney case
Talks between US House Republicans and President Biden's Democratic administration on raising the federal government's $31.4tn debt ceiling have paused
Biden Administration Eyeing High-Profile Visits to China: The Biden Administration is heating things up by looking into setting up a series of top-level visits to Beijing by top officials in the coming months
New evidence in special counsel probe may undercut Trump’s claim documents he took were automatically declassified
A French court of appeals confirmed former President Nicolas Sarkozy's three-year jail term for corruption and influence peddling
Debt Ceiling Crises Have Unleashed Political Chaos
Weibao Wang, a former software engineer at Apple, was charged with stealing trade secrets related to autonomous systems, including self-driving cars
Mobile phone giant Vodafone to cut 11,000 jobs globally over three years as new boss says its performance not good enough
Elon Musk compares George Soros to Magneto, the supervillain from the Marvel Comics series.
Warren Buffett Sells TSMC Shares Over Concerns About Taiwan's Stability
New Study Finds That Secondary Bacterial Pneumonia Is a Major Cause of Death in COVID-19 Patients Who Require Ventilator Assistance
The Prime Minister of St. Vincent and the Grenadines calls the British monarchy "an absurdity" he wants to remove in his lifetime
Remarkable video from our Fox drone team
The official tapes of Trump's deposition in the E. Jean Carroll battery (rape) and defamation case have been released.
Here is the full video that the media are purposely not sharing
King Charles III being crowned.
New York procedures cover up cold blooded first degree murder of black man by white man
Newly released video of Donald Trump’s rape trial deposition:
×