Fed hikes interest rate 0.25 point to curb inflation despite banking turmoil

WASHINGTON—The Federal Reserve raised its key short-term interest rate by a quarter percentage point Wednesday, pushing ahead with its aggressive campaign to tame inflation despite financial turmoil following Silicon Valley Bank’s collapse.

But acknowledging the crisis will constrain bank lending and weaken the economy and inflation, Fed officials are now forecasting just one more rate hike this year and even that move is uncertain,

The Fed is anticipating another quarter-point increase to a peak range of 5% to 5.25%, in line with its December estimate and lower than the level markets expected before SVB’s meltdown, according to the officials' median estimate.

"You can think of (the crisis) as being the equivalent of a rate hike and perhaps more than that," Fed Chair Jerome Powell said at a news conference.

He added that "it's too soon to tell" how much the stricter bank lending will hobble the economy and tame inflation but said it could be more significant than expected and the Fed "may have less work to do."

"It's really just a question of not knowing at this point," he said

In a statement after a two-day meeting, the Fed acknowledged recent strains in the nation’s banks and said they will soften the economy but added the financial system is stable.

“The U.S. banking system is sound and resilient,” the Fed said. “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.”

Powell said the transfer of deposits from midsize banks to larger ones has moderated and no banks are displaying the troubles that plagued Silicon Valley Bank, calling it "an outlier."

Will the Fed hike interest rates?: 4 reasons Fed will raise rates again amid SVB crisis, 4 reasons it won't

2023 banking crisis:Close to 190 banks could face Silicon Valley Bank's fate, according to a new study

The central bank underscored that its priority remains tempering consumer price increases, adding, “The (Fed’s policymaking committee) remains highly attentive to inflation risks.”

The Fed also said “additional policy firming may be appropriate” to lower inflation to the Fed’s 2% target, signaling that it’s close to winding down the hiking cycle and even the remaining quarter-point move it anticipates isn’t definite. It previously has said “ongoing increases…will be appropriate.”

Powell, however, told reporters the Fed had to act Wednesday to bolster the public's confidence that the Fed will subdue inflation that reached a 40-year high of 9.1% last June.

"It is important that we sustain that confidence with our actions as well as our words," he said.

25 basis point rate hike

The Fed’s latest move brings the federal funds rate to a range of 4.75% to 5%. It’s expected to further slow economic activity as it drives up rates for credit cards, adjustable-rate mortgages and other loans. But Americans, especially seniors, are finally benefiting from higher bank savings yields after years of paltry returns.

Amid the aftershocks of bank runs that felled SVB and another bank, the Fed faced a wrenching decision over whether to continue to back up its inflation-fighting rhetoric or take a more cautious path and pause after 4½ points of rate increases the past year. Those rate bumps at eight straight meetings marked the most rapid flurry since the early 1980s and contributed to the crisis, raising the risk that another increase could deepen banks’ troubles.

Since Fed officials were in a quiet period -- barring communication with the public --  when the crisis emerged, they couldn’t telegraph their rate plans as usual. That created rare drama for a gathering that’s typically well choreographed to avoid surprising markets.

Analysts, in turn, were split over what the Fed would do.

What factors determined the rate increase

With banking stresses easing in recent days, most economists reckoned officials would lift the fed funds rate by a quarter point. That would give a nod to the banking troubles by hiking less than the half point markets predicted before the crisis. But it would keep the Fed on track to curb inflation that has surged again so far this year after easing in late 2022. Job growth, pay increases and consumer spending also have accelerated after downshifting last year, compounding inflation concerns.

Federal Reserve Summary of Economic Projections (SEP) report

On Wednesday, the Fed said it expects the economy to grow 0.4% in 2023, slightly less than the 0.5% it projected in December, according to policymakers’ median estimate. Officials forecast just 1.2% growth in 2024, below the 1.6% they previously projected.

Many economists are less sanguine and expect the Fed’s rate increases, along with the banking troubles, to spark a recession this year.

"With the crisis making us more confident that the economy will fall into recession soon, we suspect the Fed will be cutting rates again before long," says economist Andrew Hunter of Capital Economics. His view contrasts with Fed forecasts that show no rate cuts until 2024.

Fed officials predict the 3.6% unemployment rate will rise to 4.5% by the end of the year, a bit below the 4.6% they previously forecast.

But the Fed's preferred measure of annual inflation is now expected to decline from 5.4% in January to 3.3% by year-end, above earlier estimates of 3.1%. Inflation is projected to drop to 2.5% next year.

Against that backdrop, a Fed pause likely would have bolstered stocks and lowered corporate borrowing costs, juicing an economy that officials have been trying to weaken to dampen inflation, says economist Ryan Sweet of Oxford Economics.

A pause also could have suggested the Fed fretted the banking system wasn’t stable, possibly stoking more stress, economists said.

Last week, the European Central Bank jacked up interest rates by a half point despite Credit Suisse’s troubles, which were quelled when the investment bank was purchased by UBS.  The ECB’s move didn’t roil markets, leaving many Fed watchers more confident the Fed would follow suit.

At the same time, Goldman Sachs, among others, said a rate hike would undermine the Fed’s goal of calming financial strains and assuring Americans banks are stable, especially since the central bank’s aggressive hikes helped trigger the crisis.

And since the turmoil is expected to prompt banks to pull back lending, Goldman said it would cut economic growth by up to a half point, serving as the equivalent of a quarter- to half-point rate hike. That would give the Fed breathing room to stay on the sidelines and monitor lingering fallout from the crisis.

Bank failures in 2023

SVB’s meltdown unfolded when struggling tech companies began withdrawing their money from Silicon Valley Bank for funding needs, forcing SVB to sell bonds that had lost value because of the Fed’s sharp rate hikes. The bank’s capital losses led additional customers whose deposits over $250,000 aren’t FDIC insured to withdraw their money.

"The question we were asking ourselves over that first week was, 'How did this happen?'" Powell told reporters.

Similar bank runs led to the demise of Signature Bank of New York and threatened First Republic Bank, which received $30 billion in deposits from JPMorgan and other major banks.

The Fed and other regulators announced they would provide funding to ensure depositors at SVB, Signature and possibly other banks that pose a risk to the financial system could access all their money. They also unveiled a lending facility so other regional banks could borrow money to cover withdrawals by uninsured depositors.

Regional bank stocks plummeted last week but have partly rebounded. Barclays says only a handful of them are vulnerable to bank runs because their profiles match SVB’s, with lots of uninsured depositors and risky bond holdings.

The New York Times has reported that SVB had been cited by the Fed several times for its high share of uninsured deposits and large bond investments and was undergoing a full-scale review when the crisis intensified.

Powell, however, said the bank's meltdown worsened rapidly.

"It's clear we do need to strengthen supervision and regulation and I plan to support that," he said.

Follow along for live updates:

Federal Reserve Chair Jerome Powell speaks during a news conference Wednesday, Dec. 14, 2022, at the Federal Reserve Board Building, in Washington.
Federal Reserve Chair Jerome Powell speaks during a news conference Wednesday, Dec. 14, 2022, at the Federal Reserve Board Building, in Washington.

Fed speech today live

Fed Chair Jerome Powell spoke at 2:30 p.m. ET.

Does Fed interest rate affect mortgages?

Thirty-year fixed-rate mortgages are affected by the Fed’s key short-term rate only indirectly. Their movements respond to how Fed policies affect broader conditions, including inflation and the nation's economic outlook.

"After a couple of weeks of volatility, mortgage rates are likely to stabilize as a result of this Federal Reserve hike," said Holden Lewis, home and mortgage expert at NerdWallet. “Home sellers will have to make peace with the fact that they're going to trade the low-interest rate on their current house with a higher rate on their next house, and they might not sell for the price they're hoping for," he said, adding, “Home buyers should accept that if they wait for interest rates to fall substantially, they might wait longer than they expect.”

Fed dot plot

Included in the Fed's Summary of Economic Projections report is what's known as the Fed's dot plot. The dot plot is a visual representation of where individual Fed officials predict interest rates will be in the coming years and in the long run. The dot plot was invented in late 2011 and was intended to add a new layer of transparency to the Fed's monetary policy decisions. In the latest dot plot, the majority of Fed officials indicated a target Fed funds rate between 4% to 4.75% would be appropriate for 2023. By 2024, they see rates going down to a range between 3% to 4%.

Stock market today

Stocks ended the day sharply lower, appearing to take particular issue with the Fed's refusal to commit or hint at rate cuts later this year. The Dow Jones Industrial Average slid more than 530 points, or 1.6%, to close at 32,030 on Wednesday.

The yield on the 2-year Treasury note, which reacts to Fed rate expectations, fell below 4%.10-year yields also shrank. Yields on Treasuries, and other debt, move in the opposite direction of their prices.

Housing market and rates: Housing market is 'overly sensitive' to Fed rate hikes. Experts weigh in on what's next.

How retirees can cope with a bad market: Recovering from crushing inflation, rate hikes and bank failures

First Republic Bank (FRC) stock

Shares of the bank turned sharply lower during the Fed conference even as Powell tried to reassure markets. As of 3:17 p.m. the stock was down close to 8%. Late Tuesday night The Wall Street Journal reported that the troubled regional bank tapped Lazard, a financial advisory group, to help it review strategic options that could include a sale according to people familiar with the matter.

This comes a week after First Republic received a $30 billion capital infusion for major U.S. banks including Bank of America, Citi and JPMorgan.

Fed minutes

Several weeks after every Fed meeting, the central bank releases what's known as the minutes. The minutes provide more details on what led voting members of the Fed to their decision on interest rates and summary what they discussed over the course of their two-day meeting. Sometimes the minutes even hint at what the Fed's move will be at its next meeting.

You can read the last meeting's minutes here.

Minutes from the March meeting will be released on April 12 at 2 p.m. ET.

2-year Treasury yield

Yields on 2-year Treasury notes fell after the interest rate decision was announced. Yields hovered below 4.1% around 2:15 p.m. At the onset of the banking crisis around two weeks ago, yields shot up to 5%. The last time 2-year yields were at that level was 2007.

Yields on short-term Treasury notes tend to rise when investors anticipate the Fed will hike interest rates.

Bitcoin price

Even though the banking crisis has roiled the stock market, Bitcoin has performed especially well. It's up more than 17% for the month as of Wednesday morning and was trading at over $28,000.

Why did SVB collapse?

Silicon Valley Banks' customers, who were largely startups and other tech-centric companies, started becoming needier for cash over the past year. That led them to withdraw money from their accounts.

SVB meanwhile needed to keep selling its assets, mainly U.S. Treasuries, at a loss to free up capital so that customers could withdraw funds. Normally, this is considered a safe long-term investment, but the Fed’s interest rate hikes made the value of the Treasuries tumble.

SVB collapse: What does the Silicon Valley Bank collapse mean for the economy? Experts expect modest dip.

SVB got to a point where the losses were so high, customers began to fear SVB couldn't guarantee access to every customer's funds. That fueled a massive bank run which caused the Federal Deposit Insurance Corporation to step in.

Is my money safe in the bank?

If your bank is insured by the Federal Deposit Insurance Corporation there is no need to worry that the money in your bank will vanish in the unlikely event that your bank fails.

Even though the FDIC has a $250,000 insurance limit, it along with the Fed and Treasury Department took extraordinary measures to insure deposits from Silicon Valley Bank and Signature Bank that exceeded the limit. And now there are talks of raising that limit either indefinitely or until the current banking crisis subsides.

You can learn more about how FDIC insurance works and extra steps you can take to ensure your money is safe in the bank by reading this story.

ECB rate decision

The banking crisis didn't deter the European Central Bank from hiking interest rates by 50 basis points at its meeting last week.

Even as Credit Suisse was struggling to raise capital to shore up liquidity, markets generally were unphased by the ECB decision.

“The fact that markets did not react negatively” to the move “will also provide a measure of reassurance” to the Fed, Barclays economists said.

Fed rate hike history

At the Fed's last meeting, which was held between January 31 and February 1, interest rates were bumped up 0.25 percentage point.

Interest rates were hiked seven times last year. Rates had been hovering near zero during the pandemic's economic standstill and then were raised by 0.25 percentage point starting in March.

Another increase came in May, this time by 0.50 percentage point, followed by 0.75 percentage point hikes for four consecutive meetings. The Fed ended the year with a 0.50 percentage point hike.

Banks at risk of failure

On the heels of Silicon Valley Bank’s collapse earlier this month, 186 more banks are at risk of failure even if only half of their depositors decide to withdraw their funds, a new study has found.

That is because the Federal Reserve’s aggressive interest rate hikes to tamp down inflation have eroded the value of bank assets such as government bonds and mortgage-backed securities.

Mortgage rates today

At the beginning of the month, the average annual percentage rate (APR) for a 30-year fixed mortgage is 6.77%. This is more than double the 3.22% rate we saw at the beginning of 2022 and up from 6.55% the week prior.

“After a couple of weeks of volatility, mortgage rates are likely to stabilize as a result of this Federal Reserve hike," says Holden Lewis, Home and Mortgage expert at NerdWallet. “Home buyers should accept that if they wait for interest rates to fall substantially, they might wait longer than they expect.”

Mortgage rates and the Fed: Housing market is 'overly sensitive' to Fed rate hikes. Experts weigh in on what's next.

Current mortgage rates details: How to shop for mortgage rates, more

How many banks have failed in 2023?

Two FDIC-insured banks, Silicon Valley Bank and Signature Bank, have failed this year. The FDIC took over both banks and vowed to make all depositors whole even if their account balances exceeded its traditional $250,000 insurance cap.

I bond interest rate

I bonds, inflation-protected U.S. Treasuries, issued from November through April have a composite interest rate of 6.89%.

Can I purchase I bonds with refund?: What to know about rates, deadline, restrictions

The case for I bonds: Why I doubled down on I bonds to protect my sons' inheritance from inflation

Fed meeting calendar

The Fed's next meeting is May 2-3. Here's a schedule of the remaining meetings for the year:

  • June 13-14

  • July 25-26

  • September 19-20

  • Oct/Nov 31-1

  • December 12-13

When does the Fed meet to talk rates?The Federal Reserve's 2023 schedule

Fed meeting agenda:Here's what to know and when to expect a rate change.

Powell talks inflation: Fed chair testifies before Senate on inflation, speeding up rate hikes

When is the next Fed interest rate decision?

The next Fed interest rate decision will come out on May 3.

Contributing: Paul Davidson, Swapna Venugopal Ramaswamy, Anna Kaufman 

Elisabeth Buchwald is a personal finance and markets correspondent for USA TODAY. You can follow her on Twitter @BuchElisabeth and sign up for our Daily Money newsletter here

This article originally appeared on USA TODAY: Fed hikes interest rate 0.25 point to curb inflation