WASHINGTON—The Federal Reserve raised its key short-term interest rate by a quarter percentage point Wednesday, pushing ahead with its aggressive campaign to tame inflation despite financial turmoil following Silicon Valley Bank’s collapse.
Fed officials forecast another quarter point in rate increases this year to a peak range of 5% to 5.25%, in line with its December estimate and lower than the level markets anticipated before SVB’s meltdown.
In a statement after a two-day meeting, the Fed acknowledged recent strains in the nation’s banks and said they will soften the economy but added the financial system is stable.
“The U.S. banking system is sound and resilient,” the Fed said. “Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring and inflation. The extent of these effects is uncertain.”
The central bank underscored that its priority remains tempering consumer price increases, adding, “The (Fed’s policymaking committee) remains highly attentive to inflation risks.”
The Fed also said “additional policy firming may be appropriate” to lower inflation to the Fed’s 2% target, signaling that it’s close to winding down the hiking cycle and even the remaining quarter point move it anticipates isn’t certain. It previously has said “ongoing increases…will be appropriate.”
Fed interest rate news
The Fed’s latest move brings the federal funds rate to a range of 4.75% to 5%. It’s expected to further slow economic activity as it drives up rates for credit cards, adjustable rate mortgages and other loans. But Americans, especially seniors, are finally benefiting from higher bank savings yields after years of paltry returns.
Amid the aftershocks of bank runs that felled SVB and another bank, the Fed faced a wrenching decision over whether to continue to back up its inflation-fighting rhetoric or take a more cautious path and pause after 4½ points of rate increases the past year. Those rate bumps at eight straight meetings marked the most rapid such flurry since the early 1980s and contributed to the crisis, raising the risk that another increase could deepen banks’ troubles.
Since Fed officials were in a quiet period — barring communication with the public — when the crisis emerged, they couldn’t telegraph their rate plans as usual. That created rare drama for a gathering that’s typically well choreographed to avoid surprising markets.
Analysts, in turn, were split over what the Fed would do.
What factors determined the rate increase
With banking stresses easing in recent days, most economists reckoned officials would lift the fed funds rate by a quarter point. That would give a nod to the banking troubles by hiking less than the half point markets predicted before the crisis but keep the Fed on track to curb inflation that has surged again so far this year after easing in late 2022. Job growth, pay increases and consumer spending also have accelerated after downshifting last year, compounding inflation concerns.
Will inflation go down in 2023?
On Wednesday, the Fed said it expects the economy to grow 0.4% in 2023, slightly less than the 0.5% it projected in December, according to policymakers’ median estimate. Officials forecast just 1.2% growth in 2024, below the 1.6% they previously projected.
Many economists are less sanguine and expect the Fed’s rate increases, along with the banking troubles, to spark a recession this year.
Fed officials predict the 3.6% unemployment rate will rise to 4.5% by the end of the year, a bit below the 4.6% they previously forecast.
The Fed’s preferred measure of annual inflation is expected to decline from 5.4% in January to 3.3% by year end, above earlier estimates of 3.1%. Inflation is projected to drop to 2.5% next year.
Against that backdrop, a Fed pause likely would have bolstered stocks and lowered corporate borrowing costs, juicing an economy that officials have been trying to weaken to dampen inflation, says economist Ryan Sweet of Oxford Economics.
A pause also could have suggested the Fed fretted the banking system wasn’t stable, possibly stoking more stress, economists said.
Last week, the European Central Bank jacked up interest rates by a half point despite Credit Suisse’s troubles, which were quelled when the investment bank was purchased by UBS. The ECB’s move didn’t roil markets, leaving many Fed watchers more confident the Fed would follow suit.
At the same time, Goldman Sachs, among others, said a rate hike would undermine the Fed’s goal of calming financial strains and assuring Americans banks are stable, especially since the central bank’s aggressive hikes helped trigger the crisis.
And since the turmoil is expected to prompt banks to pull back lending, Goldman said it would cut economic growth by up to a half point, serving as the equivalent of a quarter to half point rate hike. That would give the Fed breathing room to stay on the sidelines and monitor lingering fallout from the crisis.
Bank failures in 2023
SVB’s meltdown unfolded when struggling tech companies began withdrawing their money from Silicon Valley Bank for funding needs, forcing SVB to sell bonds that had lost value because of the Fed’s sharp rate hikes. The bank’s capital losses led additional customers whose deposits over $250,000 aren’t FDIC insured to withdraw their money.
Similar bank runs led to the demise of Signature Bank of New York and threatened First Republic Bank, which received $30 billion in deposits from JPMorgan and other major banks.
The Fed and other regulators announced they would provide funding to ensure depositors at SVB, Signature and possibly other banks that pose a risk to the financial system could access all their money. They also unveiled a lending facility so other regional banks could borrow money to cover withdrawals by uninsured depositors.
Regional bank stocks plummeted last week but have partly rebounded. Barclays says only a handful of them are vulnerable to bank runs because their profiles match SVB’s, with lots of uninsured depositors and risky bond holdings.
Will the Fed hike interest rates?:4 reasons Fed will raise rates again amid SVB crisis, 4 reasons it won’t
Follow along for live updates leading up to the Fed’s crucial decision today:
Powell will hold a press conference at 2:30 p.m. ET.
Stocks were moving lower ahead of the Fed’s decision on interest rates. The Dow Jones Industrial Average was down around 0.2% as of 1:45 p.m.
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Shares of First Republic Bank are volatile pivoting between gains and losses. As of 1:45 p.m. ET shares were down by 4%. Late Tuesday night The Wall Street Journal reported that the troubled regional bank tapped Lazard, a financial advisory group, to help it review strategic options that could include a sale according to people familiar with the matter.
This comes a week after First Republic received a $30 billion capital infusion for major U.S. banks including Bank of America, Citi and JPMorgan.
The consensus is that the Fed will hike interest rates by 25 basis points.
As of around 1:45 p.m. ET on Wednesday, there was an 83% chance of that happening, according to the Chicago Mercantile Exchange’s FedWatch Tool, which uses future Fed funds futures contracts to inform rate decision forecasts.
Meanwhile, there was around a 17% chance the Fed will hold rates steady, a slight increase from yesterday.
Before the banking crisis unfolded, those odds looked quite different. There was a 24% chance the Fed would hike by 50 basis points and a 76% chance of a 25 basis point hike and a 0% chance of a pause.
Several weeks after every Fed meeting, the central bank releases what’s known as the minutes. The minutes provide more details on what led voting members of the Fed to their decision on interest rates and summary what they discussed over the course of their two-day meeting. Sometimes the minutes even hint at what the Fed’s move will be at its next meeting.
You can read the last meeting’s minutes here.
Minutes from the March meeting will be released on April 12 at 2 p.m. ET.
Yields on 2-year Treasury notes are up Wednesday morning. As of 1:45 p.m. ET they hovered a hairline below 4.2%. At the onset of the banking crisis around two weeks ago, yields shot up to 5%. The last time 2-year yields were at that level was 2007.
Yields on short-term Treasury notes tend to rise when investors anticipate the Fed will hike interest rates.
Even though the banking crisis has roiled the stock market, Bitcoin has performed especially well. It’s up more than 17% for the month as of Wednesday morning and was trading at over $28,000.
Included in the Fed’s Summary of Economic Projections report, which is set to be released at 2 p.m. today, is what’s known as the Fed’s dot plot.
The dot plot is a visual representation of where individual Fed officials predict interest rates will be in the coming years and in the long run. The dot plot was invented in late 2011 and was intended to add a new layer of transparency to the Fed’s monetary policy decisions.
In the most recent dot plot, which was released in December, the majority of Fed officials at the time indicated a target Fed funds rate between 5% to 5.25% would be appropriate.
Silicon Valley Banks’ customers, who were largely startups and other tech-centric companies, started becoming needier for cash over the past year. That led them to withdraw money from their accounts.
SVB meanwhile needed to keep selling its assets, mainly U.S. Treasuries, at a loss to free up capital so that customers could withdraw funds. Normally, this is considered a safe long-term investment, but the Fed’s interest rate hikes made the value of the Treasuries tumble.
SVB got to a point where the losses were so high, customers began to fear SVB couldn’t guarantee access to every customer’s funds. That fueled a massive bank run which caused the Federal Deposit Insurance Corporation to step in.
Is my money safe in the bank?
If your bank is insured by the Federal Deposit Insurance Corporation there is no need to worry that the money in your bank will vanish in the unlikely event that your bank fails.
Even though the FDIC has a $250,000 insurance limit, it along with the Fed and Treasury Department took extraordinary measures to insure deposits from Silicon Valley Bank and Signature Bank that exceeded the limit. And now there are talks of raising that limit either indefinitely or until the current banking crisis subsides.
You can learn more about how FDIC insurance works and extra steps you can take to ensure your money is safe in the bank by reading this story.
The banking crisis didn’t deter the European Central Bank from hiking interest rates by 50 basis points at its meeting last week.
Even as Credit Suisse was struggling to raise capital to shore up liquidity, markets generally were unphased by the ECB decision.
“The fact that markets did not react negatively” to the move “will also provide a measure of reassurance” to the Fed, Barclays economists said.
At the Fed’s last meeting, which was held between January 31 and February 1, interest rates were bumped up 0.25 percentage point.
Interest rates were hiked seven times last year. Rates had been hovering near zero during the pandemic’s economic standstill and then were raised by 0.25 percentage point starting in March.
Another increase came in May, this time by 0.50 percentage point, followed by 0.75 percentage point hikes for four consecutive meetings. The Fed ended the year with a 0.50 percentage point hike.
On the heels of Silicon Valley Bank’s collapse earlier this month, 186 more banks are at risk of failure even if only half of their depositors decide to withdraw their funds, a new study has found.
That is because the Federal Reserve’s aggressive interest rate hikes to tamp down inflation have eroded the value of bank assets such as government bonds and mortgage-backed securities.
In addition to the Fed’s announcement on interest rates at 2 p.m., the central bank is set to release its quarterly Summary of Economic Projections. The report gives an overview of how Fed officials think the economy will fare in the next couple of years based on their projections for gross domestic product, the unemployment rate and inflation and where they believe interest rates will be.
But there’s a chance the Fed may delay releasing the report today because of all uncertainty stemming from the recent bank failures. The last time the Fed delayed the SEP report was in March 2020 at the onset of the pandemic.
At the beginning of the month, the average annual percentage rate (APR) for a 30-year fixed mortgage is 6.77%. This is more than double the 3.22% rate we saw at the beginning of 2022 and up from 6.55% the week prior.
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It’s anyone’s guess what Powell will tell reporters at his press conference following the rate decision announcement.
Economists at Deutsche Bank, who predict the Fed will raise rates by a quarter percentage point, think Powell will use his time at the mic to “emphasize the heightened uncertainty about the outlook given recent events.”
“He will also reinforce that the banking system remains sound and the Fed stands ready to provide liquidity as needed,” Deutsche Bank economists said in a note to clients earlier this week.
JPMorgan economists also believe the Fed will hike rates by a quarter point. They predict he will spend a considerable amount of time during his press conference walking reporters through the Fed’s plan to lower inflation, in addition to addressing the current state of banking.
Two FDIC-insured banks, Silicon Valley Bank and Signature Bank, have failed this year. The FDIC took over both banks and vowed to make all depositors whole even if their account balances exceeded its traditional $250,000 insurance cap.
I bonds, inflation-protected U.S. Treasuries, issued from November through April have a composite interest rate of 6.89%.
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The case for I bonds:Why I doubled down on I bonds to protect my sons’ inheritance from inflation
The Fed is currently targeting an interest rate range between 4.5% to 4.75%.
The Fed’s next meeting is May 2-3. Here’s a schedule of the remaining meetings for the year:
- June 13-14
- July 25-26
- September 19-20
- Oct/Nov 31-1
- December 12-13
When does the Fed meet to talk rates?The Federal Reserve’s 2023 schedule
Fed meeting agenda:Here’s what to know and when to expect a rate change.
Powell talks inflation:Fed chair testifies before Senate on inflation, speeding up rate hikes
The next Fed interest rate decision will come out on May 3.
Contributing: Paul Davidson, Swapna Venugopal Ramaswamy, Anna Kaufman
Elisabeth Buchwald is a personal finance and markets correspondent for USA TODAY. You can follow her on Twitter @BuchElisabeth and sign up for our Daily Money newsletter here