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Montevideo, May 23rd 2024 - 14:57 UTC

 

 

In a display of firmness, the Fed increases the key interest rate by a quarter point

Thursday, March 23rd 2023 - 10:48 UTC
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“The U.S. banking system is sound and resilient,” the Fed said in a statement after its latest policy two days meeting ended. “The U.S. banking system is sound and resilient,” the Fed said in a statement after its latest policy two days meeting ended.

Despite concerns of a possible recession and increased banking turmoil, the U.S. Federal Reserve extended its year-long fight against high inflation on Wednesday by raising its key interest rate by a quarter-point.

“The U.S. banking system is sound and resilient,” the Fed said in a statement after its latest policy two days meeting ended.

At the same time, the Fed warned that the financial upheaval from the collapse of two major banks is “likely to result in tighter credit conditions” and “weigh on economic activity, hiring and inflation.”

The central bank also signaled that it's likely nearing the end of its aggressive series of rate hikes. The FOMC statement admitted that “some additional policy firming may be appropriate,.” a much weaker commitment than in previous issues.

The latest rate hike suggests that chair Jerome Powell is confident that the Fed can manage a dual challenge: cool still-high inflation through higher loan rates while defusing the turmoil in the banking sector through emergency lending programs and the Biden administration's decision to cover uninsured deposits at the two failed U.S. banks.

“We have the tools to protect depositors when there's a threat of serious harm to the economy or to the financial system,” Powell said on Wednesday.

The Fed's move to signal that the end of its rate-hiking campaign is in sight may also soothe financial markets as they continue to digest the consequences of U.S. banking turmoil and the takeover of Swiss bank Credit Suisse by its larger rival UBS and the Swiss government.

While clearly signaling it is getting close to the end of a rate hiking cycle that has taken the U.S. federal funds rate to its highest level in 16 years, the Fed made it clear it is still worried about inflation. It said that hiring is “running at a robust pace” and noted that “inflation remains elevated.” It removed a phrase, “inflation has eased somewhat,” that it had included in its previous statement in February.

The troubles that suddenly erupted in the banking sector two weeks ago likely led to the Fed's decision to raise its benchmark rate by a quarter-point rather than a half-point. Some economists have cautioned that even a modest quarter-point rise in the Fed's key rate, on top of its previous hikes, could imperil weaker banks whose nervous customers may decide to withdraw significant deposits.

Some economists worry that a slowdown in lending could be enough to tip the economy into recession. Wall Street traders are betting that a weaker economy will force the Fed to start cutting rates this summer, with as many as three rate decisions by the end of 2023.

Categories: Economy, United States.

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