At its latest meeting, the Federal Reserve
announced another 25 basis point interest rate increase and put to rest speculation about whether the storm brewing in the U.S. banking sector would cause the central bank to ease up on its monetary policy.
The rate hike brings the federal funds rate to a targeted range of 4.75% to 5%, the highest level in 15 years.
The impact of recent bank failures on the economy and consumer spending will likely determine how the Fed will proceed at future meetings.
"Since our previous FOMC meeting, economic indicators have generally come in stronger than expected, demonstrating greater momentum in economic activity and inflation," Federal Reserve Chair Jerome Powell
told reporters at a press conference. "We believe, however, that events in the banking system over the past two weeks are likely to result in tighter credit
conditions for households and businesses, which would, in turn, affect economic outcomes."
Until the impact is known, Powell said that the Fed might proceed with a further rate increase to reduce inflation.
"We no longer state that we anticipate that ongoing rate increases will be appropriate to quell inflation," Powell continued.
The Fed's restrictive monetary policy has been cited as a key culprit behind the recent
failures of Silicon Valley Bank (SVB) and Signature Bank.
Many in the market had predicted that the Fed would raise rates by 25 basis points to show its resolve to reach a 2% inflation target rate. Any less would have signaled that the Fed was more focused on its role as the banker's bank, according to Dana Grigg, Founder of Camelotta Advisors.
"The Fed is trapped in a quandary between their ability to raise interest rates, given the banking situation, and their credibility at fighting inflation," Grigg said.
The Federal Reserve announced another 25 basis point interest rate increase, bringing the federal funds rate to a targeted range of 4.75% to 5%, the highest level in 15 years.
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