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WASHINGTON — The U.S. Federal Reserve Board entered its meeting this week to consider further adjustments to its benchmark lending rate facing a harsh fiscal double bind.
Continue its streak of interest rate hikes to battle ongoing U.S. inflation or ease up on the gas in an attempt to calm banking sector volatility that has been driven, at least in part, by escalating interest rates?
As was widely expected, the Wednesday decision was to split the difference with a .25% upward adjustment to its overnight lending rate. The Fed has now executed a series of nine rate hikes over the past year, moving its benchmark rate from near zero to the current range of 4.75% to 5%, the highest since 2007.
The streak of interest rate increases were one of the factors hurting Silicon Valley Bank, which earlier this month became the second-biggest U.S. bank failure in history. Bonds owned by it and other banks have seen their prices fall as interest rates rose sharply.
While some economists predicted the monetary body could push a more aggressive .5% hike in the face of economic data showing ongoing price increases and a red-hot labor market, that was before upheaval spread throughout the banking industry earlier this month following the failures of first Silicon Valley Bank and, a few days later, Signature Bank.
Banking upheaval
During a press conference following the conclusion of its meeting on Wednesday, Fed chairman Jerome Powell said the decision to move its rate up again was driven by January and February economic data reflecting persistent price increases and a labor market that continues to see job openings outpacing available workers by an almost 2-to-1 margin. Powell also noted that expected credit tightening in the banking sector "means that monetary policy may have less work to do" in cooling down consumer spending.
Powell also responded to questions about the failure of Silicon Valley Bank and said an investigation, headed by Federal Reserve vice chairman Michael Barr, was in the works and aiming "to identify what went wrong."
"We will find that," Powell said. "And then make an assessment of what are the right policies to put in place so that doesn't happen again, and then implement those policies.
"It is clear we do need to strengthen supervision and regulation."
Powell also said that he does not see the Silicon Valley Bank failure as a sign of more widespread issues within the U.S. banking industry.
"These are not weaknesses that are at all broadly through the banking system," Powell said. "This was a bank that was an outlier in terms of both its percentage of uninsured deposits and in terms of its holdings of duration risk."
What changes are coming?
Powell noted that the Fed has changed the language of its forward looking statement from previous meetings that indicated the need for likely ongoing rate increases to a somewhat softer stance that "some additional policy firming may be appropriate."
So are more interest rate hikes on the way? Or are interest rate cuts on the horizon?
Powell took a hard stance on predicting that the Fed would not be enacting any interest rate cuts before the end of the year. But, the body did estimate a terminal rate of around 5.1% before year's end in a Wednesday statement, a number that foreshadows an additional hike of .25% is likely in a subsequent meeting this year.
The Fed's battle to quell U.S. inflation that hit 40-year highs last summer has been only nominally successful with price increases on goods and services still running well north of the body's 2% target.
It is clear we do need to strengthen supervision and regulation.
–Jerome Powell, chair of the Federal Reserve
Last week, the Department of Labor reported year-over-year inflation dropped to 6% in February, down from January's 6.4% rate and the smallest annual price increase since September 2021. While price increases on goods and services showed easing on an annual basis, they still inched up .4% over January, according to the report.
The increasing cost of shelter was a primary driver behind the month-over-month increase, according to the department, while price hikes on food and recreation also contributed.
The Mountain West region, which includes Utah, continued to see the highest inflation rates in the country in February. Annual inflation came in at 6.7% for the region last month.
Consumer spending and unemployment
The Labor Department's monthly jobs report released earlier this month found U.S. employers added 311,000 new positions in February, down from January's whopping 504,000 but still outpacing economist's expectations. While unemployment for the month ticked up to 3.6% from January's 3.4%, the rate is still hovering near 50-year lows.
And, a metric closely watched by the Fed, the personal consumption expenditure price index, also ticked up more than expected in the latest report for January.
The latest inflation data came out just days after federal officials stepped in to cover depositors at California-based Silicon Valley Bank and New York's Signature Bank, after both institutions were closed following customer runs. Silicon Valley held $209 billion in assets when it was shuttered and Signature held $110 billion when New York regulators shut it down.
While both banks were outliers thanks to their very focused customer bases, the tech sector for Silicon Valley and cryptocurrency for Signature, the surprise closures have roiled the banking industry and sent stock prices for financial institutions plunging. The closures have also driven heightened scrutiny of regional banks and particularly the amount of uninsured deposits as percentage of overall assets. Both Silicon Valley and Signature banks had unusually high numbers of accounts with deposits in excess of the FDIC's $250,000 insurance limit, mostly due to their business-focused structures.
Banking uncertainty also spread to international markets.
The regulator-driven buyout of embattled Credit Suisse over the weekend by its larger Swiss bank competitor UBS helped seed some calming of global banking markets on Monday following last week's tumult after the collapse of Silicon Valley and Signature banks.
Swiss regulators orchestrated the purchase of Credit Suisse by UBS in a bid to stop more turmoil after the two U.S. bank failures. In an indication of the frantic, behind-the-scenes deal-making to resolve the issue before markets opened, the acquisition was announced late Sunday, according to The Associated Press.
Swiss authorities urged UBS to take over its smaller rival after a central bank plan for Credit Suisse to borrow up to 50 billion francs ($54 billion) last week failed to reassure investors and customers, per AP.
