The need to continue controlling inflation weighed more than the risks of recession and the banking crisis in the decision that the Federal Reserve of the United States (Fed) took yesterday raising interest rates by a quarter of a point and placing them in the range of 5% to 5.25%. The US monetary authority suggested that this could be a last hike, for now, after more than a year of bulls.
The consumer price index in the American superpower stands at 5%, which is just over half of the 9.1% achieved last June but more than double the pre-pandemic rates of less than 2% .
The new rate hike is the tenth that the Fed has ordered in the last thirteen months within the fastest series of increases in four decades. The last time interest rates exceeded 5% in the United States was in the summer of 2007, just before the global financial crisis.
Now, Fed officials are considering a pause. Unlike previous occasions, in which each increase in rates was accompanied by the notice of new increases in successive months, this time the Fed indicated that in the next resolution it will take into account “a wide range of information” that it will include labor market data, inflationary pressures and financial and international developments.
In the press conference on yesterday’s decision, adopted unanimously by Fed officials, its president, Jerome Powell, specified that “a decision on a pause” had not been made, and recalled that all institution decisions are made meeting by meeting.
Arguing the increase of 0.25 points, Powell and his team pointed out as objectives “to achieve maximum employment” and to reduce inflation “to a rate of 2% in the long term”. And, to questions about whether the Fed would accept a prolonged stretch of inflation around 3%, Powell insisted that the goal is 2%, although he made it clear that they do not expect to get there.
As for the possibility of future rate cuts starting in September if inflation continues to fall, as some investors have pointed out, Powell stated that this is “not in our forecast” as it is not expected that the prices are contained fast enough.
In adopting the decision to raise rates by another 0.25 points, the Fed had to take into account the turmoil in the country’s regional financial sector, to put it mildly. On Monday, First Republic became the third bank to be intervened by regulators in the last two months, in its case to sell it to JPMorgan. Earlier, in the wake of the failures of Silicon Valley and Signature Bank, the authorities had adopted emergency measures to try to stop a contagion that, in view of the subsequent fall of the First Republic, some continue to fear.
The Fed itself voiced the mea culpa for the lack of reflexes and aggression in the face of the symptoms of weakness that Silicon Valley presented in a context of insufficient supervision requirements in this type of entity since the deregulation approved by Donald Trump in 2019. But, in addition to possible monitoring deficiencies and obvious management negligence, at the bottom of that fall and the two that would come after it were the latest and accelerated increases in rates; increases that reduced the market value of their old mortgages and stock holdings, and against which they did not adequately hedge.
Powell emphasized his confidence in the strength of the US banking system, which he described as “solid and resilient”.
