The need to continue controlling inflation outweighed the risks of recession and the banking crisis in the decision that the Federal Reserve, the Fed, took yesterday to raise interest rates by a quarter of a point and place them in the range of 5 % to 5.25%. The US monetary authority suggested that this may be one last rise, for now, after more than a year of rises.
The consumer price index in the American superpower is at 5%, which is just over half the 9.1% reached last June, but more than double the pre-pandemic rates, below 2%.
The last time rates were above 5% was in 2007, just before the financial crisis
The new rate hike is the tenth ordered by the Fed in the last thirteen months, within the fastest series of increases in four decades. The last time interest rates exceeded 5% in the US was in the summer of 2007, just before the global financial crisis.
Now, those in charge of the Fed consider a pause. Unlike previous occasions in which each increase in rates was accompanied by the announcement of new increases in successive months, this time the Reserve indicated that in its next resolution it will take into account “a wide range of information” that will include market data. employment, inflationary pressures and financial and international developments.
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At the press conference on yesterday’s decision, adopted unanimously by the Fed officials, its president, Jerome Powell, specified that “a decision on a pause” had not been made and recalled that all the decisions of the institution are They take meeting by meeting.
In arguing the rise of 0.25 points, Powell and his team indicated as objectives “to achieve maximum employment” and reduce inflation “to a rate of 2% in the long term”. And, when asked if the Fed would accept a prolonged stretch of inflation around 3%, Powell insisted that the target is 2%, although he made it clear that they do not expect to get there immediately.
The increase acquires special relevance as it was adopted two days after the third intervention by a regional bank in two months
As for the possibility of future rate cuts from September if inflation continues to decline, as some investors have pointed out, Powell said that this is “not in our forecast” as prices are not expected to contain fast enough.
In making the decision to raise rates another 0.25 point, the Fed had to take into account the turmoil in the country’s regional financial sector, to put it mildly. On Monday, First Republic became the third bank to be seized by regulators in the last two months, in its case to sell it to JPMorgan. Earlier, in the wake of the Silicon Valley and Signature Bank bankruptcies, the authorities had taken emergency measures to try to curb a contagion that, in view of the subsequent fall of the First Republic, some continue to fear.
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The Fed itself intoned the mea culpa for the lack of reflexes and aggressiveness in the face of the symptoms of weakness that Silicon Valley had been presenting in a context of insufficient supervision requirements in this type of entity since the deregulation approved by Donald Trump in 2019. But, in addition to possible vigilance deficiencies and obvious management negligence, at the bottom of that fall and the two that would come later were the latest and accelerated rises in rates; hikes that reduced the market value of their old mortgages and security holdings, and against which they did not adequately hedge.
Powell says the US banking system remains “solid and resilient”
Powell underlined his confidence in the strength of the US banking system, which he described as “solid and resilient”. He also said that although “it is good policy to limit the expansion of the largest banks” and therefore the takeovers of medium or small entities by For most majors, it makes sense to make “exceptions” in bankruptcies like the First Republic.
