In the confrontation between inflation and the banking storm, the Federal Reserve (Fed) was clear that the question of the cost of living is the main concern for Americans.
The Fed continued with its dynamic and agreed to an increase of 0.25 points in interest rates, the ninth increase in a year. The price of money remains at 4.75-5%. His focus is more on the risks of entrenched inflation that is too high than on the turmoil that has hit the banking system, so he rules out that the rate hike could worsen financial health.
Investors didn’t understand it that way. The Dow Jones, which had positive numbers all day, closed with a fall of 500 points (-1.63%).
US Federal Reserve governors expect interest rates to rise 5.1% in 2023, unchanged from December estimates. That would involve just one more move this year. The view that rates will fall slightly in 2024 also remains unchanged, albeit less than they had predicted.
“We anticipate that an additional tightening of this policy could be appropriate,” said Jerome Powell, president of the Fed, at the press conference.
On the other hand, Powell qualified that “the banking system of the United States is solid and resilient”.
Two weeks ago Silicon Valley Bank (SVB) and Signature intervened, and the big banks deposited 30,000 million to rescue First Republic.
In the statement, the committee of governors reiterated that it monitors the functioning of the banking system and that it is prepared to adjust its monetary policy, taking into account “labor market conditions, inflationary pressure and expectations, as well as financial events and international”.
According to Powell, immediately after the problems were detected in the SVB “decisive actions were taken to protect the system and public confidence was strengthened”.
He added that all deposits are insured and that contagion, which could have led to a deep crisis, had been avoided. “We have learned the lesson, and this will allow us to prevent episodes like this in the future”, he said.
But he acknowledged that they even considered imposing a pause on rate hikes in the face of the banking turmoil.
The central bank was facing another dilemma these last two days of the meeting after eight consecutive rate hikes, since March 2022, the strongest escalation that has been recorded in decades.
To raise or not to raise rates? This was the question he was planning and which was revealed this Wednesday. The question came up unexpectedly a few weeks ago, when the weakness of the US banking system surfaced. Both President Joe Biden and Treasury Secretary Janet Yellen assured that stability had been restored once the first shock was stopped.
However, much of the responsibility for the banking turmoil was attributed to the Fed’s growing fever for interest rate hikes, which would have hit mid-sized or small institutions.
Therefore, analysts, who at the beginning of the month were betting on a rate hike of half a point for this meeting, lowered the expectation to a quarter or even a pause.
“It is too early to determine whether these latest events will change the idea of ??a soft landing,” replied Powell. This refers to whether the increase in rates can lead to recession.
He also replied that his decision of 0.25 points is based on the fact that inflation is not falling as they expected with their tight monetary policy.
In the new economic projections, the Fed increases the inflation forecast for this year from 3.1% in December to 3.3% now, which would be 2.5% in 2024, without changes in the comparison “It’s a long road”, he acknowledged, partly complicated by the strength of the labor market.
The Fed lowers economic growth, from 0.5% to 0.4%, although the drop is more pronounced in 2024: from 1.6% to 1.2%. According to this forecast, unemployment will end the year at 4.5% (for 4.6% in the other forecast), when it is at 3.6%.
