Interest rates up despite bank failures
The Federal Reserve on Wednesday increased interest rates by 0.25%, despite the banking turmoil and failure of Silicon Valley Bank. The Federal Reserve expressed caution about the recent banking crisis and indicated that hikes are near the end.
It’s all under control – just NINE increases in 1 year
This is the ninth hike since March 2022, but the FOMC noted that future increases are not assured and will depend largely on incoming data.
The increase takes the U.S. rate to a target range of 4.75% – 5%. The rate sets what banks charge each other for overnight lending but feeds through to consumer debt, mortgages, loans and credit cards.
The Fed inflation target of 2% is still some way off
Markets had been closely watching the decision, which came with a higher degree of uncertainty than usual. Initial reaction witnessed markets lift but this was quickly lost as markets fell back after digesting the Fed’s comments. The 2% inflation target has some way to go still.
Banking issues have complicated the decision process as the Fed’s pace of tightening has also contributed to liquidity problems.
Just a few weeks ago the Fed had indicated it may have to take a more aggressive path to tame inflation. But a fast-moving banking crisis quickly unravelled that thinking and contributed to general market sentiment that the Fed will be cutting rates before the year comes to a close.
In just the space of two weeks we have moved from potentially aggressive rate hikes to curb inflation to a softer approach due to the unforeseen banking crisis. Unforeseen…why?
Data – what data?
The central bank suggests it will look at the ‘data’ again before making further decisions. It does beg the question as to what data it was looking at before first suggesting a higher rate increase.
What was the Fed doing – why didn’t if see the Silicom Bank crisis coming.
I for one have lost the faith!