The risk of keeping interest rates unchanged was probably greater than the risk of raising them, so in one of the most uncertain policy meetings in recent years, she was forced to balance the consequences of the banking crisis and inflation that remains well above target from 2% in the medium term, the Fed announced a hike of 25 basis points, bringing the US reference rates to a range of 4.75-5%, the highest since 2007. Before the banking crisis, analysts were betting on an increase by 50 basis points, as the president of the Federal Reserve, Jerome Powell, had hinted in his testimony to the US Congress two weeks ago.
The change of guidance
The US banking system is healthy and resilient, Powell argues, explaining that recent developments in the banking system will likely lead to a credit crunch for businesses and households and weigh on economic activity, the labor market and inflation. But early to determine the effects, because there is too much uncertainty. If the tightening isn’t over, the news is that the Fed is changing its own guidance: no longer anticipates continuous hikes, but will evaluate whether the hikes will be appropriate in the light of the new scenario. Powell simplifies: No more continuous increases, but further increases, perhaps. In other words: the Fed is ready to adjust its monetary policy if new risks emerge from the banking crisis, which saw three American banks go bankrupt in one week. But an unexpected rate cut,
The banking crisis
The demise of Silicon Valley Bank (SVB), the second largest failure of a US bank since 2008, triggered a run on US regional banks. While overseas, the flash rescue of Crediti Suisse, bought on Sunday 19 March by Ubs for 3 billion Swiss francs, was broadcast.
Regarding the Svb, Powell claims that his management has failed seriously, but he reassured that these are not weaknesses that extend to the entire banking system, because the Svb was a very particular case, with customers concentrated in a single sector, that of tech startups, who all knew each other. And that made it easier bank run which saw $42 billion of deposits withdrawn in a single day, marking the end of the Svb. After the bankruptcy, however, it is clear that we must strengthen supervision and rules on banks in the US, admitted the president of the Fed, recalling that a review is underway to understand what went wrong. This is his only interest, he stressed.
Revised estimates on GDP and inflation
The US central bank also updated its economic estimates, which are less positive than those published in December. The American GDP will grow by only 0.4% this year (+0.5% the December forecast) and by 1.2% in 2024 (+1.6%), while the projection for 2025 remains unchanged at +1.8%. In 2023, inflation will remain at 3.3% more than the 3.1% estimated in December, to drop to 2.5% in 2024 and finally to 2.1% in 2025. Also with regard to so-called core inflation, which excluding the volatile energy and food components, the estimates have been revised upwards both this year to 3.6% compared to the previous 3.5% and to 2.6% in 2024 instead of the 2.5% estimated in December.