Unites States central bank has raised interest rates again, despite fears that the move could add to financial turmoil after a string of bank failures. The Federal Reserve increased its key rate by 0.25 percentage points, calling the banking system “sound and resilient”. But it also warned that fallout from the bank failures may hurt economic growth in the months ahead.
The Fed has been raising borrowing costs in a bid to stabilise prices. But the sharp increase in interest rates since last year has led to strains in the banking system. Two US banks – Silicon Valley Bank and Signature Bank – collapsed this month, buckling in part due to problems caused by higher interest rates.
There are concerns about the value of bonds held by banks as rising interest rates may make those bonds less valuable. Banks tend to hold large portfolios of bonds and as a result are sitting on significant potential losses. Falls in the value of bonds held by banks are not necessarily a problem unless they are forced to sell them.
Authorities around the world have said they do not think the failures threaten widespread financial stability and need to distract from efforts to bring inflation under control. Last week, the European Central Bank raised its key interest rate by 0.5 percentage points.
The Bank of England is due to make its own interest rate decision on Thursday, a day after official figures showed that inflation unexpectedly shot up in February to 10.4%. Federal Reserve chairman Jerome Powell said the Fed remained focused on its inflation fight.
He described Silicon Valley bank as an ‘outlier’ in an otherwise strong financial system. But he acknowledged that the recent turmoil was likely to drag on growth, with the full impact still unclear. Forecasts released by the bank show officials expect the economy to grow just 0.4% this year and 1.2% in 2024, a sharp slowdown from the norm – and less than officials projected in December.
The announcement from the Fed also toned down earlier statements which had said ‘ongoing’ increases in interest rates would be needed in the months ahead. Instead, the Fed said: ‘Some additional policy firming may be appropriate’. The moves “signal clearly that the Fed is nervous’, said Ian Shepherdson, chief economist at Pantheon Macroeconomics. Source- BBC.com
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