The US Federal Reserve raises interest rates by 0.25 percentage points

Dhe Federal Reserve decided to raise the key interest rate by 0.25 percentage points, but signaled a pause for the period thereafter. In the official statement after the two-day meeting, central bankers said they would take into account the cumulative tightening of monetary policy and the fact that monetary policy action usually comes with a time lag before making the next interest rate decision. In general, it will be checked whether further tightening is necessary at all.

In the statement after the previous Fed meeting, it was said that the extent to which another interest rate hike was necessary was being examined. Fed Governor Jerome Powell himself pointed out this restatement and called it significant in the press conference after the end of the monetary policy meeting. The Federal Reserve ended the zero-interest phase in March 2022 and gradually increased key interest rates almost month by month. With the interest rate decision, they have now been raised to a range between 5 and 5.25 percent.

Clearly, the US banking crisis influenced central bankers’ consideration of suspending tightening for the time being after this week. Banks are currently preparing for worse phases by applying stricter standards for lending. The financial institutions are thus unintentionally supporting monetary policy, which wants to take steam out of the economy with higher key interest rates.

Tightened lending conditions for households and businesses would in all likelihood dampen economic activity: the Fed said it was unclear to what extent. The Federal Reserve made it clear that it considers the American banking system to be strong and resilient. Powell underscored that the Federal Reserve has learned lessons from the recent banking crisis and will make proposals to change regulation accordingly. The Fed published a report on the collapse of the Silicon Valley Bank last week and admitted its own mistakes.

However, investors don’t believe that yet. This can be seen in the share prices of American regional banks, some of which lost more than ten percent of their value on Tuesday. After the rescue of the First Republic Bank by JP Morgan Chase, its CEO Jamie Dimon had predicted that the crisis was over for the time being.

So-called unrealized losses remain the big problem for banks. This involves bonds that would cause financial institutions losses if they had to sell them. The turnaround in interest rates had led to price losses on low-interest bonds. There are differing estimates of the magnitude of these unrealized losses on banks’ balance sheets. They range from 600 billion to 1.8 trillion dollars, i.e. three times as much.

Many customers have withdrawn balances from smaller institutions out of concern that they could become illiquid. To make matters worse, many banks are involved in commercial real estate projects that can no longer be described as profitable in the new interest rate environment. However, fear as a motive for fleeing has apparently subsided, and instead customers are now looking for higher returns on their deposits.

For the Fed, the situation after nine interest rate hikes since March 2022 is confusing. The US economy is showing only faint signs of slowing down. Numerous vacancies and low unemployment are driving wages up and pose the risk of inflation. The most recent core inflation rate was 4.6 percent. The Fed’s target is 2 percent.