The Federal Reserve – the central bank of the United States, known as the Fed – raised interest rates for the tenth time in a row despite the continuing worst banking turmoil since the global financial collapse.
The rate was raised again by 0.25 percentage point in the Fed’s continued effort to reduce inflation, which in the US stood at 5% in the 12 months to March – less than half the rate of price increase in the UK.
Despite the slowdown in price hikes, Fed Chairman Jerome Powell said there was “a long way to go” to reduce inflation.
However, he signaled that Wednesday’s hike could be the last for now as the Fed takes a “data-dependent approach” to future hikes. Economic data, such as the unemployment rate and the number of job vacancies, will be used to make that decision.
While higher interest rates lead to higher profits for lenders they have also put pressure on banks as some government bonds – money lent by investors to a state – lose value.
Those higher interest rates were one of the factors behind the collapse of mid-sized regional lenders in the United States, including Silicon Valley Bank (SVB), Signature Bank and, more recently, First Republic which was bought by JPMorgan Chase ahead of Monday’s market open.
The end of the First Republic became the second largest bank failure in US history. Markets are nervous after Tuesday’s sell-off in US bank stocks, a delayed reaction to the fall of First Republic.
But the Fed has argued that the US banking system is “healthy and resilient.”
“Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring and inflation,” he said.
“The extent of these effects remains uncertain.”
Despite assurances from the banking sector, Powell said the strain on the banking system in March when the SVB collapsed was translating into even “tighter” financial conditions.
After Wednesday’s hike, US interest rates are on hold 5% to 5.25%, up from 4.75% to 4.5% since last increase in March. They haven’t been this tall since 2007.
In the US, the interest rate is a range, rather than a single percentage – unlike in the UK – because the Fed isn’t allowed to set a specific figure. The figures are a target rate set to guide lenders.
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Recession fears in the US are mounting as the economy slows sharply in the first quarter
Rising interest makes loans more expensive, increasing the cost of mortgage payments and credit card debt.
The increase occurred despite signs of a slowdown in the US economy.
Recession fears have been raised as the world’s largest economy suffered a sharp slowdown in the first three months of the year, according to the first official estimate.
Growth was measured at 1.1% between January and March, the Commerce Department said.