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US Federal Reserve Revises Interest Rates Slightly Higher Amid Global Banking Turmoil

US Federal Reserve Revises Interest Rates Slightly Higher Amid Global Banking Turmoil

The Federal Reserve, the US central bank, this Wednesday, 22/03, raised interest rates by a quarter of a percentage point, but indicated it was about to suspend further increases in borrowing costs after the recent collapse of two US banks.
Fed Chairman Jerome Powell sought to reassure investors about the soundness of the banking system, saying that the management of Silicon Valley Bank “failed” but that the bank’s collapse does not indicate broader weaknesses in the banking system.

“These are not weaknesses that are running broadly through the banking system,” he said, adding that the Credit Suisse acquisition appears to have been a positive outcome.

The Federal Open Market Committee’s policy statement also said the US banking system is “solid and resilient”.

Even so, Wall Street closed sharply lower after Powell’s statements in a press conference interview that authorities were still committed to fighting inflation, while also observing the extent to which recent bank failures have cooled demand and slowed lending.

The long-awaited rate hike by the Fed, which had made eight previous rate hikes in the past year, sought to balance the risk of rampant inflation with the threat of instability in the banking system.

Signifying a major shift – seen as appropriate by analysts – prompted by the sudden failures this month at Silicon Valley Bank (SVB) and Signature Bank, the Fed’s latest monetary policy statement no longer makes reference to “continued increases” in rates.

The US banking sector is in turmoil after California regulators on 10 March shut down Silicon Valley Bank in what is the largest US bank failure since the 2008 financial crisis.

The collapse of the Santa Clara, California-based bank and Signature Bank, another mid-sized US bank, triggered a slump in bank shares as investors worried about other time bombs in the banking system that prompted UBS Group AG to acquire Credit Suisse Group AG, ima 167-year-old credit institution, to avert a wider crisis.

Relentless interest rate hikes by the Fed to curb inflation are among the factors singled out as causing the biggest collapse in the banking sector since the 2008 financial crisis.

“The Fed is now living with a hope and a prayer that it hasn’t done irreparable damage to the banking system,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments in Menomonee Falls, Wisconsin. “The Fed is probably thinking that financial stresses are replacing future interest rate hikes.”

Citigroup CEO Jane Fraser on Thursday 3/23 expressed confidence in US banks and said the recent turmoil does not represent a credit crunch.

“This is a situation where it’s some banks that have some problems, and we’d better make sure we nip that in the bud,” she said in Washington on Wednesday.

Meanwhile, as beleaguered First Republic Bank considers its options, Treasury Secretary Janet Yellen said on Wednesday, 3/22, that there is no discussion of insurance for all deposits.

She told a congressional hearing that the government “is not considering insuring all uninsured bank deposits.” She also said that the Treasury Department has not considered anything to do with asset guarantees.

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