The US Federal Reserve has announced its ninth consecutive interest rate hike, despite concerns that the move could exacerbate financial instability in the wake of two bank failures. The central bank increased its key rate by 0.25 percentage points to 4.75%-5%, marking the highest level since 2007, and suggested that “some additional policy firming may be appropriate”.
The bank has been increasing borrowing costs in a bid to curb inflation, but the rapid increase in interest rates since last year has placed significant strains on the banking system. Silicon Valley Bank and Signature Bank have both collapsed this month, in part due to problems caused by higher interest rates. There are also concerns about the value of bonds held by banks, which may become less valuable as interest rates continue to rise.
Federal Reserve chairman Jerome Powell said the bank remained focused on its inflation fight, describing Silicon Valley bank as an “outlier” in an otherwise strong financial system. However, he acknowledged that the recent turmoil was likely to drag on growth, with the full impact still unclear.
Bank projections indicate that officials expect the economy to grow just 0.4% this year and 1.2% in 2024, and that inflation is expected to fall this year but less than was projected a few months ago. Despite the risks, the Fed is poised to stop raising rates soon, with projections indicating interest rates of roughly 5.1% at the end of 2023, unchanged since December.
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