The Federal Reserve hiked its key interest rate
A dilemma.
The Federal Reserve raised its key interest rate by another quarter-percentage point on Wednesday (March 22), signaling confidence that recent panic in the banking sector will be contained.
That puts the federal funds rate—or the rate at which the Fed lends to banks—at a target range of 4.75% to 5%, up from a previous range of up to 4.75%.
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The Fed’s decision comes after a week of turmoil in the banking sector, from the collapse of Silicon Valley Bank—the second-biggest US bank failure in history—to a deal this past Sunday that saw Swiss banking giant UBS buying Credit Suisse. Deposit outflows at troubled institutions, and the emergency responses of regulators in the US and elsewhere, created deep uncertainty as to which direction the central bank would go with its decision on interest rates.
Inflation is starting to ease in the US
The failure of Silicon Valley Bank stemmed in part from the Fed’s move to sharply hike interest rates in an effort to tame down inflation, which has made everything from groceries to rent more expensive.
Over the last year, the Fed raised rates from nearly zero to 4.75%. Though inflation is starting to ease, the rate in February was still nearly triple the Fed’s target.
Some critics though have questioned whether the hikes in interest rates really are bringing down inflation. For example, part of the slowdown in inflation certainly comes from the ease of pandemic-driven supply chain challenges.
Tomorrow, the Bank of England decides on its own interest rate hike, having taken in both higher-than-expected UK inflation data and the bank implosions of the past week in the US and Switzerland.
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