US Fed hikes interest rate by 25 bps to curb inflation despite banking turmoil

In an expected move, America's central bank - Federal Reserve - on Wednesday hiked interest rates by 25 basis points to tame high inflation despite the banking crisis. The Fed was earlier expected to raise rates by 50 basis points, but the banking crisis in the US appears to have prompted it to go slow to avoid a further meltdown. The central bank has committed to bringing down the inflation to 2 per cent from currently over 6 per cent.

In its statement, the Fed said recent indicators pointed to modest growth in spending and production, and job gains had picked up and were running at a robust pace. The unemployment rate has remained low and inflation remains elevated.

"The Federal Open Market Committee (the central bank's rate-setting panel) seeks to achieve maximum employment and inflation at the rate of 2 per cent over the longer run," it said, adding that in support of these goals, "the Committee decided to raise the target range for the federal funds rate to 4-3/4 to 5 percent". 

The committee, the central bank said, will closely monitor incoming information and assess the implications for monetary policy. It, however, said that "some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 per cent over time".

To fight the persistent hot inflation, the Fed has so far increased rates from zero to 4.75 to 5 per cent, all in just one year. This continuous hike, however, has hit the regional banks hard and could push the economy into recession. Also, it was the high-interest rate that brought down two banks - Silicon Valley Bank and Signature Bank - and pushed many others on the brink of collapse like the First Republic Bank.

Today, the Fed said the US banking system is sound and resilient. "Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity,
hiring, and inflation. The extent of these effects is uncertain," it said, adding that the committee remains highly attentive to inflation risks.

While inflation is still way above the central bank's tolerance limit, investors wanted the Fed not to rock the markets by pressing ahead with 50 basis points, as was suggested by minutes from the Jan 31-Feb 1 meeting. In the last meeting, the Fed had hiked the rate by 25 basis points.

The minutes from the last meeting showed that a few participants favored raising the target range for the federal funds rate by 50 basis points. The participants favoring a 50-basis point increase noted that a larger increase would more quickly bring the target range close to the levels they believed would achieve a sufficiently restrictive stance.
 
After the collapse of the two banks, America's banking major Goldman Sachs said it expected the central bank to pause its rate hike. The lender predicted that the Fed would pause rate rises later this month due to banking system stress. "In light of recent stress in the banking system, we no longer expect the FOMC to deliver a rate hike at its March 22 meeting with considerable uncertainty about the path beyond March," the investment bank had said.