Fed could ‘speed up’ interest rate hikes amid inflation
Federal Chair Jerome Powell told the Senate that the central bank will likely continue to raise interest rates amid surges in job growth and inflation.
Damien Henderson, Associated Press
The Federal Reserve is expected to raise its key short-term interest rate by 25 basis points today, continuing its push to curb inflation which has slowed, but remains far above the target that would signal soaring prices are under control.
The bigger question looming as Fed officials meet Wednesday is whether they’ll hint that this latest increase will be the central bank’s final rate bump of the year. Policymakers are waiting to see how much lending tightens following the collapse of Silicon Valley Bank and Signature Bank, which may also slow the economy and curb inflation.
Many economists believe the Fed could signal that it could pause its string of hikes if inflation and economic growth continue to cool and fears of a U.S. default on its debt mount.
“With the economic data softening and the risks of a debt ceiling crisis rising, we still think the Fed’s next move after that will be a cut,’’ wrote Andrew Hunter, deputy chief U.S. economist for Capital Economics last week, predicting that increases will end after a quarter of a percentage point rate hike this week.
The Fed could also resume hiking rates if high prices and a still-hot labor market don’t slow down as expected. It is not expected to hint at any rate cuts this year.
Nationwide chief economist Kathy Bostjancic also expects the Fed to increase its interest rate by 25 basis points, putting the benchmark rate in a range of 5% to 5.25%, up from near zero in early 2022.
“We see that as the last hike this cycle and look for the Fed to keep rates at that restrictive level throughout 2023,’’ Bostjancic wrote in an investors note last week. the tightening of credit availability.”
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What time is the Federal Reserve announcement today?
The Fed will reveal its decision at 2 p.m.
First Republic was the third bank failure in two months, overtaking Silicon Valley Bank as the second biggest bank collapse in U.S. history.
SVB’s collapse occurred when struggling tech companies with accounts began taking their money out to cover their expenses, leading SVB to sell bonds that were now worth less because of the Fed’s string of rate hikes. The bank run then accelerated as customers with deposits greater than $250,000, which aren’t FDIC insured, rushed to withdraw their money amid SVB’s capital losses.
Similar bank runs led to the failure of Signature Bank, which played a key role in the cryptocurrency industry, and put First Republic Bank in jeopardy. First Republic received $30 billion in deposits from JPMorgan Chase and 10 other big banks to keep it afloat but ultimately saw its share price plummet when its quarterly results showed depositors had withdrawn over $100 billion. Regulators seized the bank Monday and sold its accounts and most of its assets to JP Morgan Chase.
Federal regulators also intervened with SVB and Signature banks, taking the unusual step of backing all their deposits including those the FDIC was not obligated to insure because they were greater than $250,000. They also created a lending facility that would enable other regional banks to borrow money to cover withdrawals by uninsured depositors if needed.
A Federal Reserve report noted that lax oversight by regulators contributed to SVB’s failure.
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First Republic Bank became the second biggest bank failure in history when federal regulators seized the institution on Monday and JP Morgan Chase committed to acquiring the bank’s customer accounts and most of its assets.
First Republic had been on shaky ground after the failures of SVB Bank and Signature Bank in March, with account holders and investors worried that it might meet a similar fate since it also had a large number of uninsured deposits. First Republic had also been a major lender to the wealthy, granting them low interest loans that were now of little value.
Eleven larger banks attempted to come to First Republic’s rescue last month, giving it $30 billion. But First Republic revealed in its quarterly report that depositors had withdrawn over $100 billion, a bank run that was accelerated by the ease with which panic can spread through social media.
Investors fled, sending the bank’s shares plunging 75% last week with the stock price down to $3.51 at the close of markets Friday.
First Republic Bank sold: The bank was seized by federal regulators and sold to JP Morgan
− Charisse Jones and Associated Press
What is the rate of inflation?
Inflation slowed in March, according to a measure favored by the Fed, with consumer prices rising 4.2% as compared to the same month a year ago, which was the smallest uptick since May 2021, according to the Commerce Department. March prices fell from 5.1% the previous month and 7% in June which marked a four-decade high.
Core prices, which don’t count volatile items like food and energy and so offer a clearer snapshot of longer trends, rose 0.3%, lowering the annual increase to 4.6%. That was down from 4.7% in February, a revised figure that ticked upward.
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The Fed’s rate hike in March lifted its federal funds rate to a range of 4.75% to 5%. Today’s anticipated hike would lift the rate to a range of 5% to 5.25%.
