Washington- The Federal Reserve raised interest rates for the ninth time in a row since the beginning of last year, and chose to continue its campaign against high inflation despite pressures in the banking industry after the collapse of two US banks during the past two weeks. Why did he make this decision?
The Fed’s members voted unanimously to raise the benchmark interest rate by a quarter of a percentage point (0.25%), bringing interest to nearly 5%, which would make it more expensive for people who seek auto loans, mortgage loans, or take out credit cards. their credit.
This decision reflects the convictions of the members of the interest rate setting committee, who still believe that higher interest rates may be necessary to restore price stability and reduce inflation rates.
Inflation versus stability of the banking sector
Some observers had urged the Fed to stop raising interest rates, at least temporarily, in order to assess the repercussions of the collapse of Silicon Valley Bank (Silicon Valley SVB) and Signature Bank earlier this month, while other banks witnessed Among them is the First Republic, which has withdrawn large amounts of deposits.
However, it seems that the tension in the banking system has eased in recent days, as Treasury Secretary Janet Yellen said – Tuesday – in her testimony before the Senate, “The large withdrawals from regional banks have stabilized, and the American banking system is sound and resilient.”
Meanwhile, consumer prices continue to rise, albeit at lower rates than during the second half of last year.
Annual inflation in February was 6%, down from 9.1% in June, but still well above the Reserve Bank’s target of 2%.
US Federal Reserve Chairman Jerome Powell says – in his press statement yesterday – that he and his colleagues are fully aware that “high inflation poses great difficulties because it erodes the purchasing power of citizens, especially those who are least able to meet the high cost of necessities such as food, housing and transportation.”
On the other hand, the “Fed” is conducting an extensive investigation into bank failures, and “Powell” did not mind yesterday the participation of independent parties in the investigations or conducting independent investigations.
The bank will report to Congress by May 1, and Powell comments, “It’s 100% certain that there will be independent investigations when a bank fails, and of course we welcome that.”
Growing recession fears
The Reserve Bank’s decision came in line with the opinion of the majority of financial experts, and Sherif Othman, an economist at Poise Investment Company, said – in an interview with Al Jazeera Net – “It was very difficult not to raise interest rates to calm the banking sector (because that) would be at the expense of efforts.” Continuing to fight inflation, which seems to be a top priority for the Central Bank at this moment.
He added that not raising the interest rate would have been understood as a fear and warning of the consequences of raising the interest rate, so the hike came down by a quarter of a percent, which reflected the Fed’s confidence in the stability of the US market despite the crisis it has been witnessing for two weeks.
The Fed is counting on other banks to be more conservative about providing loans after they saw the collapse of the “Silicon Valley” and “Signature” banks, which in turn will lead to a tightening of credit conditions for personal and corporate loans, and the impact on economic activity and employment, which will contribute to controlling inflation rates. .
Traditionally, higher interest rates slow economic growth, but this leaves the United States at risk of tipping the economy into recession.
However, Fed policymakers do not expect a recession, with the US economy expected to grow by 0.4% this year.