US Raises Interest Rates Despite Banking Crisis

Key interest rate lifted to 4.75 percent-5 percent, up from near zero a year ago. Credit: Carlos Delgado, CC-BY-SA-1/Wikipedia

The US central bank has raised its key interest rate by 0.25 percentage points, despite fears that the move could aggravate the global banking crisis.

Wednesday’s rate rise is the ninth in a row by the Fed. It lifts its key interest rate to 4.75 percent-5 percent, up from near zero a year ago, the highest level since 2007.

“The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 4-3/4 to 5 percent,” the Fed announced.

Higher interest rates mean the cost to buy a home, borrow to expand a business or take on other debt goes up. By making the such activity more expensive, the Fed expects demand to fall, cooling prices.

US focused on battling inflation through higher interest rates

Federal Reserve Chairman Jerome Powell said the Fed remained focused on its inflation fight. The year-of-year over rate of inflation has slowed to 6 percent, but it’s still above the Fed’s preferred rate of 2 percent.

“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 Committee remains highly attentive to inflation risks,” the Fed says.

“Restoring price stability is essential to set the stage for achieving maximum employment and stable prices over the longer run,” Powell said in his semiannual report to Congress earlier this month.

“The historical record cautions strongly against prematurely loosening policy. We will stay the course until the job is done.”

Will a rise in interest rates aggravate the banking crisis?

The sharp increase in interest rates since last year has led to strains in the banking system. Two US banks – Silicon Valley Bank and Signature Bank – collapsed this month, buckling in part due to problems caused by higher interest rates.

There are concerns about the value of bonds held by banks as rising interest rates may make those bonds less valuable.

Banks tend to hold large portfolios of bonds and as a result, are sitting on significant potential losses. Falls in the value of bonds held by banks are not necessarily a problem unless they are forced to sell them.

Authorities around the world have said they do not think the failures threaten widespread financial stability and need to distract from efforts to bring inflation under control.

Last week, the European Central Bank raised its key interest rate by 0.5 percentage points.

The Bank of England is due to make its own interest rate decision on Thursday, a day after official figures showed that inflation unexpectedly shot up in February to 10.4 percent.