The Federal Reserve (Fed) continued with its dynamics and agreed to a 0.25% increase in interest rates, the ninth rise in a year. The price of money remains at 4.75-5%. The Fed insists that it remains focused on inflation risks, an issue that worries governors more than the turmoil that has impacted the banking system.
US central bank governors expect interest rates to rise to 5.1% in 2023, unchanged from December estimates. This would imply just another move this year. The idea that rates will drop slightly in 2024 also remains unchanged, although less than they had anticipated.
The Fed stressed its commitment to achieve 2% inflation, the issue that is most complex and most affects the daily lives of Americans. Jerome Powell, president of the Federal Reserve, qualified, however, that “the US banking system is solid and resilient.” Two weeks ago Silicon Valley Bank and Signature were intervened, while the big banks deposited 30,000 million to rescue the First Republic.
But in its statement, the committee 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 and international events.”
“Decisive actions were taken to protect the system and public confidence was strengthened,” Powell added at the press conference. “All deposits are insured,” he said. “We have learned our lesson and this will allow us to prevent episodes like this in the future,” she said.
But he acknowledged that a pause was imposed on rate hikes due to the banking confusion, but, given the stability achieved, they saw that economic data shows that inflation continues to be entrenched “at too high a level.”
The central bank faced a new dilemma on the two days of this week’s meeting after eight consecutive rate hikes, since March 2022. It is the strongest escalation in decades.
To raise or not to raise rates? This was the question that she planned and that was revealed this Wednesday. The question came up unexpectedly a couple of weeks ago when the weakness of the US banking system surfaced.
Both President Joe Biden and Treasury Secretary Janet Yellen guaranteed that stability had been restored. However, a large part of the responsibility for the banking turmoil was attributed to the Fed’s rampant fever for interest rate hikes, which would have affected medium-sized or small banks.
The idea is that those banks would have invested in assets at a price, and if they needed to sell, their profit was below the price at which they bought.
Jerome Powell also caused blinking when at the beginning of the month he assured Congress that the Federal Reserve would be forced to raise rates more than previously stated due to the persistence of high inflation, which remains at 6%, far from the 2% target. , and the resistance of the labor market, one of the factors attributed to keeping prices high. He insisted on this idea this Wednesday.
Many analysts then bet on an increase of half a point at this meeting in March. But the irruption of the banking crisis led many to rethink it. So there were voices in favor of 0.25% or even for the Fed to go on pause.
There was an important reason for continuing to raise rates, as Powell remarked. Inflation is not falling at the rate that experts and the central bank expected. No forecast indicated that prices would fall to 3% throughout this year, territory considered not very comfortable.
In its economic projections, the Federal Reserve increases its inflation forecast for this year from 3.1% in December to 3.3% now, which would be 2.5% in 2024, unchanged in comparison. After the Fed meeting, Powell that “this is a long way.”
In addition, the Fed lowers economic growth, from 0.5% to 0.4%, although the fall is more pronounced in 2024: from 1.6% to 1.2%. According to this forecast, unemployment will end the year at 4.5% (compared to 4.6% in the previous forecast), when it currently stands at 3.6%. The central bank tries to cool the economy, which affects an increase in unemployment, in its mission to combat inflation.
