Federal Reserve officials on Wednesday announced another quarter-point increase in interest rates, shaking off concerns about the financial system’s stability after the collapse of two regional banks.
The decision was one of the riskiest in years for the Fed, coming shortly after the stunning failure of Silicon Valley Bank and Signature Bank sparked a major government intervention.
In a statement following two days of meetings, the central bank’s rate-setting committee said borrowing costs could still rise further but cautioned that the failure of the two banks will likely lead other lenders to pull back, cutting into economic growth. The implication: that might mean less work for the Fed in its fight against inflation.
Its goal is to slow spending and investment as a means to tamp down the worst price spikes in four decades.
“Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation,” according to the statement. “The extent of these effects is uncertain.”
Recent inflation data shows surging prices are cooling only slowly, but the string of bank failures has led to concern that rising interest rates could wreak further havoc on financial markets, increasing the odds of a sharp recession.
But some former Fed officials cautioned in the lead-up to the meeting that pausing the rate hike campaign could feed anxiety that more turmoil is ahead.
“The U.S. banking system is sound and resilient,” the Fed said in its statement.
Meanwhile, Fed policymakers held their forecast steady of how much they expect to need to raise rates this year — to just above 5 percent, which would be achieved by just one further quarter-point increase.
But they also downgraded the size of rate cuts they project to deliver next year, adding further ammunition to their claim that even after they stop increasing borrowing costs, they plan to hold rates at punishing levels for a while.