WASHINGTON - The US Federal ReserveFederal Reserve raised its benchmark lending rate on Wednesday, aiming to find a balance between high inflation and the possibility of further upheaval in the commercial banking sector.
The target range was lifted by a quarter-point increase to 4.75 -- 5.00 per cent at the end of a two-day policy meeting.
There have been concerns that higher rates could cause banking sector turmoil after Silicon Valley Bank's SVB collapse, despite the Fed's commitment to lowering inflation.
To meet liquidity needs, SVB had to sell assets it had expected to hold to maturity, and these had lost market value while rates went up.
In a statement on Wednesday, the Fed said recent banking sector developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring and inflation. The policy-setting Federal Open Market Committee FOMC stated that additional policy firming may be necessary to get to a position that is sufficiently restrictive to bring inflation down.
It came after two weeks of market turmoil and the collapse of three regional lenders.
Wednesday's decision underscores the Fed's determination to tackle inflation, which remains stubbornly above policymakers' long-term annual target of two percent despite an effort to lower price increases.
Swiss investment bank Credit Suisse swallowed up by regional rival UBS after its shares fell to a record low after the implosions of SVB and two other regional lenders pummelled banking stocks around the world last week.
Wall Street stocks fell as Fed Chair Powell addressed reporters after the central bank's decision.
Powell said that depositors' savings in the banking system are safe and the Fed is prepared to use all of our tools as needed to keep the system safe and sound.
He said that the Fed needs to boost supervision and regulation of banks, and that SVB's management had failed badly. Powell said that rate cuts are not in our base case.
The Fed will continue with a more modest hiking cycle because of the combination of hot US economic data at the beginning of the year and uncertainty in the banking sector.
Treasury Secretary Janet Yellen said on Tuesday that the US banking sector was stabilising after authorities stepped in to protect deposits after the failures of SVB and Signature Bank.
She conceded that similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion. Yellen said this week that there was a relief rally in the stock markets, along with actions by the Fed and other major central banks to improve access to liquidity.
The Fed lowered its 2023 GDP growth projections to 0.4 per cent from 0.5 per cent in December, lowering its projections on Wednesday.
Median projections for the Fed's benchmark rate at the end of the year were unchanged, while inflation expectations rose slightly.
The Fed decided to raise rates by 0.5 percentage points, following the European Central Bank's decision to raise rates by 0.5 percentage points last week.
Christine Lagarde, the chief of the European Central Bank, warned on Wednesday that the eurozone's monetary policymakers will still have to cover to make sure inflation pressures don't happen. She said that the recent banking turmoil could add to the downside risks in the single currency area.