The Federal Reserve raised interest rates by 0.25 percentage points on Wednesday in the ninth consecutive hike since last March.
From The Hill’s Tobias Burns: “The move shows that the Fed’s first priority remains bringing down elevated price levels, even as the bank’s rate increases have strained portfolios in the banking sector, triggering some poorly managed banks to collapse.”
Inflation, which the Fed is trying to manage with the rate hikes, has been falling since last year, but it’s still higher than the Fed’s target inflation rate of 2 percent annually.
Some, such as economist Paul Krugman, recently said the Fed should pause interest rate hikes amid stresses in the banking sector.
“The spark was lit by the collapse of Silicon Valley Bank,” Tobias wrote, “where a run by rich depositors largely from the venture capital sector led to insolvency. The bank couldn’t pay depositors because their money was tied up in longer-term bonds that hadn’t yet come to maturity and are sensitive to interest rate hikes.” (Read the full report here)
Federal Reserve Chairman Jerome Powell said Wednesday the banking system is “sound and resilient” and that mismanagement led to the collapse.
“At a basic level, Silicon Valley Bank management failed badly,” Powell said. “They grew the bank very quickly, they exposed the bank to significant liquidity risk and interest rate risk, they didn’t hedge that risk.”
Powell said the latest interest rate hike was needed in light of recent inflation data. The Federal Open Market Committee unanimously approved the increase.
