Fed Raises Interest Rates, Possibly For Last Time, Amid Probe Of SVB; Rate Hikes “Were Well Telegraphed And Many Banks Managed To Deal With Them,” Jerome Powell Says
The US Federal Reserve raised interest rates today for the ninth time since last year by an expected 25 basis points, or 0.25%. But Fed chief Jerome Powell has slowly signaled no more rate hikes in this latest cycle, as a credit crunch following the recent banking crisis could help tame inflation without more Fed action.
It’s mixed news for companies and investors hoping to avoid recession, including media companies looking for an increase in advertising.
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Reducing rising inflation to 2% is still very much the Fed’s goal, Powell said at a press conference after the latest rate hike, but he said “there may be other ways to get there.”
The Federal Open Market Committee warned in its official statement that it will “closely monitor incoming information and evaluate the implications for monetary policy. [and] anticipate that some additional policy tightening may be appropriate to achieve a monetary policy stance sufficiently restrictive to bring inflation back to 2 percent over time.”
But the FOMC “will take into account the cumulative tightening of monetary policy [to date]the lags with which monetary policy affects economic activity and inflation, and economic and financial developments” – probably including the collapse of two major regional banks.
After Silicon Valley Bank (SVB) in California and Signature Bank in New York melted down earlier this month, the Fed, Treasury and FDIC rushed to restore confidence in the system, mainly by announcing that the government would withhold all deposits. Normally, any deposits above $250,000 are not insured, but the announcement was seen as key to avoiding a run on other banks.
The volatile and slightly jittery stock market, still hoping for a soft landing, rallied slightly late in the trading session on Powell’s comments. But shares tanked just before the close. It may be upon a closer reading of Powell’s comments and/or Treasury Secretary Janet Yellen’s separate afternoon testimony to a Senate subcommittee that the FDIC is not considering providing “blanket insurance” for bank deposits.
Powell said the Fed is investigating bank oversight and supervision. “At a basic level, Silicon Valley Bank management has failed miserably. They grew rapidly, accumulated interest rate and liquidity risks, and did not hedge those risks,” he said, resulting in a fast and massive bank run by a large group of connected depositors.
“My only interest is that we identify what went wrong here. How did this happen, and what is the right policy to put in place?” He declined to comment on what the measure might entail.
Powell is taking some heat for the Fed causing the crisis by raising interest rates too high too quickly. He pushed back, noting that the walks were indicated “and it still happened.”
“Our rate hikes have been well timed to the market and many banks have managed to deal with them.”
Overall, he said, “Our view is that the banking system is healthy, it’s resilient, has strong liquidity.”
A boon of sorts – tighter credit conditions caused by renewed bank reluctance to lend could help reduce inflation, he said.
Sen. Elizabeth Warren recently slammed Powell at a Capitol Hill hearing, saying his drive to slow the economy in search of lower inflation goes hand in hand with lower employment, meaning people could be thrown out of work by the Fed’s high interest rate regimen.
Powell reiterated today that “we understand our actions” around interest have an impact. But high inflation also hurts the lowest wage earners, he noted.
He said the Fed considered officially declaring a clear pause on interest rate hikes “in the days leading up to this meeting … But labor market and inflation [data] came in stronger” than hoped for. So, our decision was to do 25 basis points and change guidance from ‘continuous hikes’ to ‘some additional hikes’” possible.
The DJIA fell by 530 points or 1.63%. The Nasdaq fell 1.6% and the S&P 500 fell 1.65%. Media and technology stocks trailed indexes late in the session. WBD and Netflix closed up nearly 4%, Paramount up 3%, Comcast and Disney up 2%. Many have regained some ground in aftermarket trading. Alphabet, Apple, Meta and Amazon closed 1% to 2% lower.
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Originally published March 22, 2023, 11:00 p.m