Fed raises rates and says the US banking system is “safe”

The us federal reserve (Fed, central bank), raised its reference rates moderately by a quarter of a percentage point to 4.75-5.00% as expected by the market, still concerned about inflation and despite problems in the banking sector that could “weigh ” on economy.

The Fed argued that the problems of the banking sector “They are likely to result in tighter credit conditions for households and companiesand could weigh on the economic activityhe employment and the inflation”according to its statement at the end of its monetary policy meeting that began on Tuesday.

“The extent of the effects (of the banking crisis) is uncertain”, added the central bank. In any case, he reaffirmed that “the US banking system (is) sound and resilientand”.

The president of the Fed, Jerome Powell, affirmed in a press conference after the diffusion of the statement on Wednesday that all the money of savers in the United States is “sure”.

Powell further noted that the Fed will take out “lessons” of this episode and called for reinforcing banking supervision and regulation.

New forecasts, new “actions”:

The Fed updated its economic forecasts for the United States and now anticipates inflation that is somewhat higher than expected in December, of 3.6% in 2023 compared to 3.5% initially forecast. The central bank will continue to “watch” prices. The agency lowered its 2023 GDP growth forecast to 0.4% from 0.5%.

The members of the Monetary Policy Committee (FOMC), which met Tuesday and Wednesday, agreed that there will be other interest rate hikes in the coming months, although in their statement they speak of “additional actions to reaffirm monetary policy”, without explicitly mention fees.

difficult balance:

The Fed held its March meeting in the midst of a dilemma: continue raising its monetary policy rate to try to contain inflation by making credit more expensive and thus containing consumption and investment, or pause to avoid a worsening of the difficulties experienced by some banks exposed to rising interest rates.

The market went from expecting a strong rise of half a percentage point in rates after statements by the president of the agency, to predicting stable rates after the outbreak of the banking crisis with the bankruptcy of three financial institutions in less than a week in the United States.

The bankruptcy of regional banks Silicon Valley Bank (SVB), Signature Bank and Silvergate created a wave of concern. Governments, central banks and regulators intervened urgently to try to restore confidence in the system and avoid contagion.

Likewise, the Credit Suisse bank, which had already been in difficulties for years, was shaken and was bought last Sunday by its compatriot UBS.

The Fed lent about $164 billion to banks in about ten days so that all customers who want to withdraw their money can do so. In addition, it lent 142.8 billion to the two entities created by US regulators to manage the assets and resources of SVB and Signature Bank. These credits raised its balance sheet, which it had been trying to reduce since last June.

The Fed was under pressure since the fall of these banks was largely due to very fast and very strong rate increases, which reduced the value of the assets of these institutions.

In addition, the European Central Bank on Thursday raised its rates by half a percentage point, ensuring that inflation is its number one priority.

In the United States, 12-month inflation eased in February to 6%, according to the Consumer Price Index (CPI).

Following the Fed’s announcements, the New York stock market fell sharply at the end of the session. After staying during the day, the indices fell minutes before closing: the Dow Jones finally lost 1.63%the technological Nasdaq 1.60% and the S&P 500 1.65%

The dollar was losing 1.05% at 19:15 GMT against the euro. Traders saw the Fed’s announcement as a sign of easing.

Source: AFP