In an expected move, America's central bank Federal Reserve hiked interest rates by 25 basis points to tame high inflation despite the banking crisis. The Fed was expected to raise rates by 50 basis points earlier in the day, but the banking crisis in the US appears to have prompted it to go slow to avoid a further meltdown. The central bank has pledged to reduce inflation by 2 per cent from currently over 6 per cent.
The Fed said recent indicators pointed to modest growth in spending and production, and job gains had picked up and were running at a robust pace. The unemployment rate remains low and the inflation rate is elevated.
The Federal Open Market CommitteeFederal Open Market Committee, the central bank's rate-setting panel, wants to achieve maximum employment and inflation at a rate of 2 per cent over the long run, and the Committee decided to raise the target range for the federal funds rate to 4 -- 3 4 to 5 percent The committee will closely monitor information and assess the implications for monetary policy, according to the Federal Open Market Committee. The Fed has so far increased rates from zero to 5.75 to 5 per cent, all in just one year, and said that additional policy firming might be necessary to achieve a stance of monetary policy that is sufficiently restrictive to return inflation to 2 per cent over time. The continuous hike has hit the regional banks hard and could cause the economy to go into a recession. It was the high-interest rate that brought down two banks - Silicon Valley Bank and Signature Bank - and pushed many others on the brink of collapse, like the First Republic Bank.
The Fed said today that the US banking system is sound and resilient. Recent developments are likely to result in tighter credit conditions for households and businesses and affect economic activity, according to recent developments.
The extent of these effects is uncertain, it said, and that the committee remains attentive to inflation risks.
While inflation is still above the center bank's tolerance limit, investors wanted the Fed not to rock the markets by pressing ahead with 50 basis points, as suggested by minutes from the Jan 31 -- Feb 1 meeting. The Fed had hiked the rate by 25 basis points in the last meeting.
The minutes from the last meeting showed that a number of participants supported raising the target range for the federal funds rate by 50 basis points. The participants favoring a 50 basis point increase noted that a larger increase would bring the target range closer to the levels they believed would achieve a sufficiently restrictive stance.
After the collapse of the two banks, America's banking major Goldman Sachs said it expected the central bank to pause its rate hike. The lender predicted that the Fed would increase the pause rate later this month due to banking system stress. In light of recent stress in the banking system, we no longer expect the FOMC to deliver a rate hike at its March 22 meeting with considerable uncertainty about the path beyond March, according to the investment bank.