Fed raises interest rates despite banking turmoil

AFP: The US central bank has raised interest rates again, despite fears that the move could add to financial turmoil after a string of recent bank failures.

The Federal Reserve increased its key rate by 0.25 percentage points and said more action could be “appropriate” as consumer prices continue to climb.

The Fed has been raising borrowing costs to try to slow the economy and ease pressures pushing up prices.
But sharp rate rises have led to strains in the banking system.

Two US banks - Silicon Valley Bank and Signature Bank - collapsed this month, buckling in part due to problems caused by higher interest rates.

But authorities around the world have said they do not think the failures threaten widespread financial stability and need not distract from efforts to bring inflation under control. Last week, the European Central Bank raised its key interest rate by 0.5 percentage points. 

The Bank of England is due to make its own interest rate decision today, a day after official figures showed that inflation unexpectedly shot up in February to 10.4 percent.

In a statement, the Fed said the US banking system was “sound and resilient”. 
But it said the banking turmoil could drag on growth and toned down earlier statements which said higher interest rates were likely to be needed in the months ahead. 

Instead, the Fed said: “some additional policy firming may be appropriate”.
Yesterday’s move marks the ninth rate rise in a row by the Fed. It lifts its key interest rate to 4.75 percent-5 percent, up from near zero a year ago - the highest level since 2007.

Higher interest rates mean the cost to buy a home, borrow to expand a business or take on other debt goes up.
By making such activity more expensive, the Fed expects demand to fall, cooling prices. That has started to happen in the US housing market, where purchases have slowed sharply over the last year and the median sales price in February was lower than it was a year ago - the first such decline in more than a decade.

But overall the economy has held up better than expected and prices continue to climb faster than the 2 percent rate considered healthy.

Inflation, the rate at which prices climb, jumped 6 percent in the 12 months to February. The cost of some items, including food and airfare, is surging even faster.

Earlier this month, Federal Reserve Chairman Jerome Powell warned that officials might need to push interest rates higher than expected to bring the situation under control.