In the midst of the banking crisis unleashed in recent days in the United States and Europe, the United States Federal Reserve (Fed) decided yesterday to increase the reference interest rate by 25 basis points, in its objective to control inflation. And he pointed out that the terminal rate is only 25 points more, so in principle the cycle of increases would end at the next Fed meeting. Despite the less hawkish tone of the entity chaired by Jerome Powell, the focus now turns to when will begin to lower the rate, something the market and central bank officials differ on. Wall Street reacted with losses.
The move set the Fed’s benchmark overnight interest rate in the range of 4.75% to 5%, with updated projections showing that 10 of 18 policy committee members expect rates to rise another quarter of a quarter. percentage point by the end of this year, the same point considered in the December projections.
But in a key shift spurred by the flash failures this month of Silicon Valley Bank (SVB) and Signature Bank, the Federal Reserve’s latest monetary policy statement no longer says “continued hikes” in rates are likely appropriate. That language had been in every statement since the March 16, 2022 decision to start the rate hike cycle.
Fed policymakers believe that curbing inflation may require one more interest rate hike this year, but less easing next year than most thought would be appropriate just three months ago.
Based on the median estimate in the Fed’s latest quarterly summary of economic projections, US central bankers expect the key interest rate, currently between 4.75% and 5% after Wednesday’s 25 basis point hike, stands at 5.1% at the end of the year.
This is the same median projection as in December, before a series of better-than-expected growth and inflation data, but also before the recent turmoil in the banking sector that the authorities say will affect economic growth. Powell sought in a press conference to reassure depositors, consumers and companies about the soundness of the system after the avalanche of measures that the central bank and other regulators have taken in the last two weeks. “These actions demonstrate that all depositors’ savings in the banking system are safe,” Powell said.
The Fed chief said that officials “stand ready to use all of our tools as necessary to keep it safe and sound.” The turmoil, however, is likely to have an effect on economic growth and prospects, he said, with recent events likely to translate into tighter credit conditions for households and businesses.
The Fed updated its economic forecasts for the US and now anticipates inflation that is somewhat higher than expected in December, at 3.6% for 2023 compared to 3.5% initially forecast. The agency also lowered its 2023 GDP growth forecast to 0.4% from 0.5% previously.
Following the Fed’s announcements, Wall Street took a sharp pullback at the end of the session. The Dow Jones industrial average finally lost 1.63%; the technological Nasdaq, 1.60%; and the S&P 500, 1.65%.
Source: Ambito
