The Federal Reserve on Wednesday announced a modest quarter-point increase in its benchmark interest rate, an inflation-fighting hike that was scaled back as the Fed grapples with sudden turmoil in the banking industry.
In its statement, the Fed said the U.S. banking system “is sound and resilient.” But officials referred indirectly to the failures of two banks in the past two weeks and the rescue of a third bank as influencing their unanimous decision.
“Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain,” the statement said.
The move was one of the Fed’s most closely watched decisions in years, bringing the benchmark interest rate to a range of 4.75% to 5%. Markets initially reacted positively to the announcement.
It was the ninth rate hike by the Fed in the past year as the central bank tries to lower inflation that reached a four-decade high of 9.1% last summer. Inflation declined to an annual rate of 6% in February, still far above the Fed’s target of 2%.
Fed Chairman Jerome H. Powell had signaled early in March that a half-point rate increase was likely. But that was before the failure of Silicon Valley Bank in California on March 10 and New York’s Signature Bank, collapses that led to fears of broader problems in the banking industry.
Economists say the bank failures were caused in part by the Fed’s rapid rate hikes, which decreased the value of long-term debt held by the banks.
