Despite banking crisis, the US increases interest rates.
Despite concerns that the move could lead to further financial turmoil following a series of bank failures, the US central bank has raised interest rates again. The Federal Reserve increased its key rate by 0.25 percentage points, citing a “sound and resilient” banking system.
However, the Fed also cautioned that fallout from the recent bank failures could impact economic growth in the near future. The Fed has been steadily increasing borrowing costs in an effort to stabilize prices, but the sharp rise in interest rates since last year has put pressure on the banking system.
This pressure is evidenced by the collapse of two US banks, Silicon Valley Bank and Signature Bank, this month, which were partially due to problems caused by higher interest rates. Additionally, there are concerns that the value of bonds held by banks may decrease as interest rates rise, which could cause further strain on the banking system.
Impacts on the economy
The Federal Reserve has released forecasts showing that the US economy is projected to grow only 0.4% this year and 1.2% in 2024, marking a significant slowdown from previous years and lower than officials had projected in December.
The announcement from the Fed also suggests a toned-down approach to earlier statements, which had indicated that ongoing increases in interest rates would be necessary in the coming months. Instead, the Fed stated that “some additional policy firming may be appropriate.” This shift “clearly signals that the Fed is nervous,” according to Ian Shepherdson, chief economist at Pantheon Macroeconomics.
