The Federal Reserve approved a 0.25% increase in March, the ninth rate hike in the last year and one of the most intensely questioned increases in the Fed’s ongoing fight against inflation.
Fed officials wrapped up their two-day Federal Open Market Committee (FOMC) meeting on Wednesday, in which monetary policymakers unanimously agreed to raise interest rates by 25 basis points.
March’s quarter-percentage-point increase lifted the target range for the federal funds rate from 4.75% to 5%, the highest level since the lead-up to the 2008-2009 financial crisis.
The dovish decision by Fed members to raise rates by 0.25% follows two weeks of growing uncertainty surrounding the stability of the U.S. financial system and the ongoing worry that additional stresses could lead to more bank runs.
Fed members suggested that any further issues in the banking sector are unlikely, claiming in an official FOMC statement that “[t]he U.S. banking system is sound and resilient.”
While “recent developments are likely to result in tighter credit conditions for households and businesses … the extent of these effects is uncertain,” the FOMC statement read.
Nevertheless, March’s quarter-percentage-point increase went a long way to reassure market participants that the path toward a soft landing is still a viable possibility.
If Fed members had gone with the decision to pause or cut rates, it would have signaled to the broader market that things behind the scenes were much worse than they appeared to the public.
“Right now, pausing [interest rates] would cause disruption,” said former Fed Vice Chair Donald Kohn, per The Wall Street Journal. Had the Fed made the choice to back away from further rate hikes, it would have been a “signal that they [Federal Reserve members] don’t have confidence in their financial stability tools.”
These tools include interest on reserve balances, central bank liquidity swaps, and open market operations, among others.
But some economists worry the Fed has overdone it with its cycle of rate hikes and might need to reverse course to re-stabilize the economy.
The contentious 0.25% increase wasn’t the best decision, according to Goldman Sachs’ chief economist Jan Hatzius, who argued that the Fed should have moved more cautiously given recent banking failures.
“If more issues crop up after Wednesday, that’s also not going to be very confidence inspiring,” Hatzius said, per the WSJ.
Banking issues have extended beyond the borders of the U.S., with Credit Suisse getting a lifeline of over $50 billion to stay afloat from the Swiss National Bank last week, as The Dallas Express reported.
Federal Reserve Chairman Jerome Powell was dismissive of further issues in the financial sector during his FOMC press conference.
“You’ve seen that we have the tools to protect depositors when there’s a threat of serious harm to the economy or to the financial system and we’re prepared to use those tools,” Powell said at the conference. “I think depositors should assume that their deposits are safe.”
While Chairman Powell was optimistic about the probability of steering the economy away from a hard landing, it may be unwise to take the possibility at face value in light of his and U.S. Treasury Secretary Janet Yellen’s long-running and seemingly disproven claims that inflation would only be transitory.
In addition to Wednesday’s interest rate increase, the Fed also published its Summary of Economic Projections, representing all of the FOMC participants’ projections for four key economic indicators as well as the Federal Funds Rate.
The Fed’s current economic projections place the median U.S. inflation rate in 2024 at 2.5% and 2.1% in 2025.
Though February’s annual inflation rate fell to 6% from 6.4% the month before, the Fed still has to achieve a robust 4% drop in annual inflation before reaching its 2% goal.