In its announcement, the Fed also addressed the effects of the banking crisis resulting from the collapse of the Silicon Valley Bank (SVB) and at the same time attempted to boost confidence in the sector. “The US banking system is healthy and resilient,” the Fed said.
However, recent developments are likely to limit household and corporate lending and affect economic activity, hiring and inflation. “The extent of this impact is uncertain,” the Fed said.
Fed chief Jerome Powell tried to counter fears that the crisis would spread. “Savings in the banking system are safe,” Powell said at a news conference. The central bank will continue to monitor the situation closely and is ready to use “all our tools” to ensure the safety and health of the banking system.
At the same time, Powell emphasized that “supervision and regulation” of banks must be strengthened. “The management of the Silicon Valley Bank failed badly.”
The collapse of the Californian regional bank almost two weeks ago had caused considerable turbulence in the banking sector and on the stock exchanges. A number of other banks in the US and Europe have since run into trouble. In Switzerland, it hit the big bank Credit Suisse, which has since been bought by its competitor UBS.
The Fed had to take the banking crisis into account when making its latest interest rate decision, because a sharp hike in interest rates could have exacerbated the sector’s difficulties. In the fight against high inflation, the central bank had already raised the key interest rate eight times in the past twelve months. Some analysts had expected the Fed to now pause in rate hikes.
The central bank continued to raise interest rates. However, as in February, it left it at an increase of 0.25 percentage points. Powell had hinted a few days before the SVB’s collapse that the hike could be bigger.
Investors reacted with disappointment to the Fed’s announcements. Wall Street stock prices slide into the red after the Fed statement. The Dow Jones stock index lost 1.63 percent over the day. The dollar also depreciated against the euro.
Inflation in the US rose sharply last year as a result of the corona pandemic and the Russian war of aggression against Ukraine. In June 2022, the inflation rate reached 9.1 percent, a 40-year high. Inflation has since fallen significantly and was most recently at six percent. However, this is still well above the target of two percent.
