The Federal Reserve, the US central bank known as the Fed, has raised interest rates for the ninth consecutive day.
In an attempt to reduce inflation, the rate was increased by 0.25 percent.
Prior to the collapse Silicon Valley Bank and subsequent rescues of US banks and takeovers of Credit Suisse, a higher increase was expected.
Before the worst banking crisis since 2008 started, Jerome Powell, Fed chair, had suggested a 0.5 percentage point increase to speed up rate hikes. The Fed’s 0.25 percentage point increase last month slowed the pace of rate increases.
Lenders make higher profits with high interest rates, but banks also feel the pressure as certain government bonds and state IOUs lose value due to their high interest rates.
After Wednesday’s increase in US interest rates, they now stand at 4.75% to 5.5%. This is an increase of 4.5% to 4.75% from the February last increase.
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The interest rate in the US is not a fixed percentage, but a range.
Instead, banks are guided by a target rate.
Some economists expected the Fed would halt rate increases altogether.
The Fed addressed banking concerns and stated that the US banking system was sound and resilient, but it is not yet clear what the impact of recent developments will be.
Recent developments will likely result in tighter credit terms for households and businesses, which could impact economic activity, hiring and inflation. These effects are not yet known.
Mr Powell stated that tighter conditions are equivalent in effect to an interest rate increase and may have a greater impact.
“A tightening of financial conditions in this way would work in the same direction that rate tightening in principle. It could be viewed as the equivalent to a rate increase, or possibly more. Of course, it is impossible to do an assessment of that assessment right now with any accuracy whatsoever.
On Wednesday, Powell stated that interest rate hikes are not necessary to keep inflation below 2%. Powell said that “some” additional increases “may be appropriate”.
He addressed the banking crisis and said that he was committed to learning from the episode and working to prevent similar episodes from ever happening again.
The Fed also issued its first interest rate projections since December.
Mr Powell stated that GDP, which is a measure of economic output or economic health, will not exceed 0.4% this year and will rise to 1.2% next year. This is far below the rate of growth many politicians hope for.
The unemployment rate will rise to 4.5% by the end this year and 4.6% by the end next year.
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