Despite the financial crisis affecting American regional banks, the Federal Reserve (Fed, American central bank) raised its rates by a quarter of a point on Wednesday 22 March. They are now between 4.75% and 5%, their highest level since 2007. This is the ninth increase in a row for a year, when the Fed recognized that inflation was not ” provisional ” and had abandoned the free money policy that had prevailed since the Covid-19 pandemic.
At the beginning of March, the president of the institution, Jerome Powell, had hinted that he would raise his rates by half a point, due to persistent inflation (6% at an annual rate). The banking crisis led to the interim decision.
Mr. Powell began his opening remarks on bank failures, including that of the Silicon Valley Bank, by explaining that the financial system was sound, and that the Fed would intervene again to protect savers if necessary. “Basically, the management of Silicon Valley Bank has seriously failed”Mr Powell said, accusing him of taking interest rate and liquidity risks “important”. “We are committed to learning from this episode and working to prevent events like this from happening again,” he added, while the bank did not take the necessary corrective measures despite multiple interventions by the San Francisco Fed.
Financial security assured
This statement was not intended to explain that the fight against inflation should be put on hold to avoid the financial crisis. On the contrary, Mr. Powell sought to decouple the two subjects and to emphasize that with financial security assured, the Fed could continue its fight to bring inflation down to 2%, while he remains worried about the rise in prices in non-housing services, fueled by labor shortages.
This diagnosis does not mean that the banking crisis will not have an effect on the economy. Mr Powell felt she was going to have an impact ” equivalent “ to a rate hike of at least a quarter point. “Recent developments should translate into tighter credit conditions for households and businesses and weigh on economic activity, hiring and inflation”, says the Fed in its press release. Clearly, a banking crisis plus a 0.25 point hike has an effect at least as restrictive on the economy as the half-point hike initially forecast. “The Fed raised rates, and so did Silicon Valley Bank,” summarizes the wall street journal.
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