The Federal Reserve hiked its target federal-funds interest rate by a quarter of a percentage point Wednesday, the ninth in a series of hikes that started in March 2022.
The hike brings the Fed’s target rate to a range between 4.75% and 5% with the Fed maintaining its pace of slowed increases. Most economists expected a quarter-point interest-rate hike in an effort to bring inflation down, but the current banking calamities contributed to the possibility of a pause, according to Bloomberg.
As of Wednesday morning, markets were estimating over 90% odds that the Fed would hike rates by a quarter-point, CNBC reported. This brings rates to their highest level since late 2007.
“I think that’s most likely,” Peter St. Onge, research fellow in economics at the Heritage Foundation told the Daily Caller News Foundation. “The trade-off for them is higher rates put more stress on banks.”
Until the recent banking disasters, officials suggested they would definitely hike interest rates, according to CNBC.
Lower rates guarantee continued inflation, said St. Onge. But since reducing inflation through interest rate hikes is what contributed to recent banking sector turmoil, there is a conflict in goals, according to CNBC. (RELATED: Fed Hikes Interest Rates To Highest Levels In 15 Years)
Although they do not believe it is necessary yet, U.S. officials are studying possible ways to increase Federal Deposit Insurance Corporation (FDIC) coverage to more bank deposits as a strategy to stave off a financial crisis, according to Bloomberg.
Additionally, “Similar actions [to bailing out SVB and Signature Bank] could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion,” Yellen said in her speech at the American Bankers Association Washington Summit.
[Federal Reserve Chair Jerome Powell] “doesn’t want to keep [rates] flat or cut, because I think he’s afraid that that would signal distress,” said St. Onge. “People would conclude that the problem is bigger, and they’re trying to paper it over and sort of let the whole thing quietly go.”
WASHINGTON, DC – MARCH 08: Federal Reserve Chair Jerome Powell testifies before the House Committee on Financial Services on Capitol Hill on March 08, 2023 in Washington, DC. (Photo by Anna Moneymaker/Getty Images)
“The Fed has simply become too unpredictable. … This is the same Powell who promised that a 75-basis-point hike was ‘off the table’ and then promptly delivered three in a row,” E.J. Antoni, research fellow for Regional Economics at the Heritage Foundation’s Center for Data Analysis, told the DCNF. “After it has walked back so many positions, I have no confidence in predicting this Fed’s actions.”
Following the Fed’s decision to raise rates, we should anticipate volatility to persist in the financial markets, according to Antoni.
“We believe … that events in the banking system over the past two weeks are likely to result in tighter credit conditions for households and businesses which would, in turn, affect economic outcomes,” Powell said in the press conference following the Fed’s decision. “It’s too soon to determine the extent of these effects and therefore too soon to tell how monetary policy should respond.”
“As a result we no longer state that we anticipate that ongoing rate increases will be appropriate to quell inflation,” he added, suggesting possible deviation from the continued hikes previously predicted.
Projecting 5.1% rates by the end of 2023, Powell said there likely will be no cuts this year.
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