The Federal Reserve Increases Interest Rates amid Banking Crises

The Federal Reserve continued to raise interest rates by a quarter of a percent (25 basis points) on Wednesday, a decision subject to speculation by financial experts, as the central bank weighs reducing soaring inflation and stabilizing the banking system.

This is the same point increase it implemented in February before the recent banking crises, although the increase of 25 basis points in February was a decrease from the previous increases of 50 and 27 basis points respectively.

Federal Reserve Chairman Jerome Powell. (MANDEL NGAN/AFP via Getty Images)

The Fed was caught between a rock and a hard place. With the Fed raising interest rates, it is likely that banks will continue to struggle with liquidity and may cause more bank failures. Failure to raise the interest rate is likely to increase the inflation that previous rate hikes were intended to reduce.

According to Barrons, past inflation and jobs data called for a continuation more Interest rate hikes, while the recent banking crisis indicated that a pause would be wise.

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The Fed’s decision on Wednesday appears to have attempted to balance both concerns.

The Fed had previously raised the interest rate eight times since last March to a range of 4.5 percent to 4.75 percent. On Wednesday, it continued its march towards the expected target rate of 5.1 percent.

Prior to the recent banking crises, Federal Reserve Chairman Jerome Powell stated on March 7 that stronger-than-expected economic data meant that the central bank would likely need to raise interest rates higher than previously expected.

But the rapid increase in interest rates over the past year has exposed weaknesses in the banking system, leading to the collapse of Silicon Valley Bank and Signature Bank. More than a week later, the First Republic was bailed out with $30 billion in deposits and Credit Suisse was bought by UBS to prevent further collapses.

By mid-March, Moody’s Investors Service cut its outlook for the US banking system from stable to negative, putting six US banks under review for possible credit rating downgrades.

“We changed to negative from a stable view of the US banking system to reflect the rapid deterioration in the operating environment following the filings of Silicon Valley Bank (SVB), Silvergate Bank and Signature Bank (SNY) and the failures of SVB and SVB,” Moody’s said.

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