Amidst Banking Crisis the Federal Reserve Raises Interest Rates by Quarter-Point

The U.S. Federal Reserve announced March 22 that it was raising its key lending rate by a quarter point, continuing its aggressive rate hike policy in an effort to tame stubbornly high inflation.

The Fed did this in spite of the turmoil roiling Wall Street following the collapse of Silicon Valley Bank and failure of Signature Bank.

Why Did The Federal Reserve Raise Interest Rates?

Since the start of 2022, the Federal Reserve has raised its key lending rate nine times, from a range of zero to a range of 4.75% to 5.0%. While inflation has cooled slightly, it is still at 6.04%,; that’s down from last summer’s peak inflation of 9.1%, but way above the Fed’s 2% target and higher than the long term average of 3.28%.

Despite the increase, investor optimism was reinvigorated after the central bank suggested the end of additional rate increases is nigh. In its policy statement, the Fed did not say that “ongoing increases” in rates would be appropriate, which is something it has said in every release since March 2022.

Will the Federal Reserve Raise Rates Again?

The Federal Reserve didn’t give any hint on whether it will raise rates when it meets next in May. Instead, it will rely on economic data and the stability of the banking sector before it decides.

Strong economic data points to additional tightening but the fallout from the recent banking crisis points to a pause in rate hikes. Analysts expect the Fed to raise its rate hike by one more quarter-point increase this year before starting to pivot in 2024.

That said, the recent rate hike is expected to further slow economic activity as it drives up the rate for credit cards and other adjustable-rate mortgages and other loans. This puts the idea of a soft landing into jeopardy. If anything, the U.S. economy could very well need to fall into a recession to bring inflation down to its 2% target.

Thanks to hot economic data, it appears as though the Fed will need to raise rates more than one more time. After all, it takes 12-18 months for the full impact of the Fed’s tightening to make its way into the economy.

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The U.S. Federal Reserve raised its key lending rate by 25-basis points, to a range of of 4.75% to 5.0%. It hinted it was ready to pause additional rate hikes, but strong economic data suggests it will need to implement more hikes to bring inflation down to 2%. It has a long way to go.

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