The Federal Reserve announced a rate hike, even as fears about the stability of the financial system in the wake of the collapse of Silicon Valley Bank.
Following a two-day meeting of its monetary policy committee in Washington, the central bank announced Wednesday that it would raise its interest rate target by a quarter of a percentage point. The move comes after the Fed conducted another February hike of the same magnitude and a barrage of enormous half-percentage point and 0.75-point increases before that.
The central bank’s key overnight rate is now currently 4.75% to 5%. Rates are now the highest they have been since 2007, at the outset of the global financial crisis.
The move, while expected, is a controversial one given the volatility in the financial sector following SVB’s failure nearly two weeks ago. The rate hike sends a sign that the Fed continues to see inflation as a bigger threat than the economic repercussions of the uncertainty about the banking system.
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While annual inflation, as gauged by the consumer price index, fell to 6% for the year ending in February after it had been running at 6.4% the month before, the figure is still about three times higher than the Fed’s preferred level.
Some economists and corporate executives were hoping for the Fed to pause its rate hiking this week, and investors still thought there was a chance that the central bank would do so. Still, Fed Chairman Jerome Powell has made it clear that a return to price stability is a key mission of the central bank right now.
Boston Fed President Eric Rosengren said last week that the Fed should stop raising rates given the events following SVB’s failure.
“Financial crises create demand destruction. Banks reduce credit availability, consumers hold off large purchases, businesses defer spending. Interest rates should pause until the degree of demand destruction can be evaluated,” Rosengren said.
Bill Ackman, billionaire investor and founder of Pershing Square, also supported holding rates steady, and Tesla founder Elon Musk had encouraged the Fed to slash rates rather than increase them.
Before Wednesday's announcement, investors expected the Fed to cut rates over the course of 2023, bond market prices indicated.
Throughout the pandemic, the Fed kept rates at near zero for a historic amount of time. But the central bank’s rate target has risen quickly since it began tightening in March of last year. The campaign marks the most forceful rate hikes since the Great Inflation of the late 1970s and early 1980s.
The Fed does have some cushion to work with. The U.S. labor market is chugging along and, in some senses, defying gravity.
The economy added 311,000 jobs in February, more than expected, and the unemployment rate ticked up a bit to 3.6%, which is still a very low figure by historical standards. The unemployment rate had previously dropped to a shocking 3.4%, the lowest since 1969.
But with this latest rate hike, and the bevy of other even more aggressive revisions over the past year or so, that red-hot labor market isn’t expected to hold. Economists expect unemployment to rise this year as the higher rates filter through almost every aspect of the economy.
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There are concerns that the economy will fall into a recession, a fear that has only grown since the banking crisis began.
Last week, Goldman Sachs raised the chances of a recession in the U.S. to 35%, up 10 percentage points from its previous prediction. The firm said the forecast reflects “increased near-term uncertainty around the economic effects of small bank stress.”