US Fed hikes interest rate to curb inflation amid global banking turmoil

The Federal Reserve on Wednesday raised interest rates by a quarter of a percentage point, but indicated.

It was on the verge of pausing further increases in borrowing costs after the recent collapse of two US banks, reported news agency Reuters.

Fed Chair Jerome Powell reassured investors about the soundness of the banking system and said that the management of Silicon Valley Bank “failed badly,” but that the bank’s collapse did not indicate wider weaknesses in the banking system adding that the takeover of Credit Suisse seemed to have been a positive outcome.

In a statement, the Fed said the impact of the banking crisis was “uncertain” but inflation “remains elevated”. Despite that, Wall Street ended sharply lower after Powell said that officials were still intent on fighting inflation while also eying the extent to which recent bank failures had cooled demand and slowed lending.

The much-anticipated rate hike by the Fed, which had delivered eight previous rate hikes in the past year, sought to balance the risk of rampant inflation with the threat of instability in the banking system.

The US central bank announced that its benchmark interest rate would rise another quarter of a percentage point to a range of 4.75% to 5% – its ninth consecutive rate rise and the highest rate since 2007, reported The Guardian.

The banking sector has been in turmoil after California regulators on March 10 closed Silicon Valley Bank in the largest US bank failure since the 2008 financial crisis.

The collapse of the Santa Clara, California-based bank and Signature Bank, another US midsized lender, prompted a rout in banking stocks as investors worried about other ticking bombs in the banking system and led to UBS Group AG’s takeover of 167-year-old Credit Suisse Group AG to avert a wider crisis.

The Fed’s relentless rate hikes to rein in inflation are one of the factors that is blamed for the biggest banking sector meltdown since the 2008 financial crisis.

“The Fed is now living on a hope and a prayer that they haven’t done irreparable harm to the banking system,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments in Menomonee Falls, Wisconsin. “The Fed is probably thinking financial stresses are substituting for future rate increases.”

Meanwhile, Treasury Secretary Janet Yellen said on Wednesday there is no discussion on insurance for all deposits.

She told a congressional hearing that the government “is not considering insuring all uninsured bank deposits.” She also said the Treasury Department has not considered anything to do with guarantees for assets. First Republic shares closed down more than 15%.

The latest move to restore calm to restive regional bank stocks came as Pacific Western Bank, one of the regional lenders caught up in the market volatility, said it had raised $1.4 billion from investment firm Atlas SP Partners.

Shares of the bank closed down 17% even as it tried to assuage investor worries by saying it had more than $11.4 billion in cash as of March 20.

But less than two weeks after Silicon Valley Bank sank under the weight of bond-related losses due to surging interest rates, the CEO of hedge fund Man Group, Luke Ellis, said the turmoil was not over and predicted further bank failures.

Policymakers have stressed the turmoil is different from the crisis 15 years ago, saying banks are better capitalised and funds more easily available.

SVB’s collapse kicked off a tumultuous 10 days for banks which led to the 3 billion Swiss franc ($3.2 billion) weekend takeover of Credit Suisse by rival UBS.

In further fallout, a conservative Republican and a progressive Democrat in the US Senate are introducing legislation to replace the Fed’s internal watchdog with one appointed by the president, aiming to tighten bank supervision following the failures of SVB and Signature Bank.

Republican Rick Scott and Democrat Elizabeth Warren blamed the collapse of the two banks on regulatory failures at the US central bank, which has operated up to now with an internal inspector general who reports to the Fed board.

The Fed was not immediately available for comment.

The Federal Deposit Insurance Corporation (FDIC) has moved the bid deadline for Silicon Valley Private Bank to Friday from Wednesday, a source familiar with the matter said on Wednesday. Earlier this week, the FDIC decided to break up Silicon Valley Bank and hold two separate auctions for its traditional deposits unit and its private bank after failing to find a buyer for the failed lender last week.