The Federal Reserve on Wednesday raised its short-term borrowing rate another 0.25%, the fourth increase this year, in order to fight inflation despite concerns that previous rate hikes triggered the nation's banking crisis. The central bank’s benchmark interest rate has been rising rapidly, leading to a significant decrease in inflation but also tanking the value of bonds held by Silicon Valley Bank, precipitating its failure and setting off a chain reaction of damage for the financial sector.
In a statement, the Fed dismissed fears about the banking system, saying “The U.S. banking system is sound and resilient.” The central bank also left the door open for more rate increases, noting that “additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time.”
A survey by Bloomberg last week found that most economists expected the Fed to raise interest rates by 0.25% on Wednesday, matching the increase that the central bank imposed at its most recent meeting last month. Over the last year, the Fed has raised its benchmark interest rate by 4.5%, the fastest pace since the 1980s.
The Fed has chosen to combat inflation by raising borrowing costs with the hope that it will slow the economy and reduce demand. However, this tactic could have the unintended consequence of pushing the U.S. economy into a recession and putting millions out of work.
The rise in interest rates also threatens the stability of the banking system, as nearly 190 banks are already at risk of collapse due to high interest rates and declining asset values. A pause on rate increases, however, could allow high prices to persist, eating away at household budgets.
To avoid facing a choice between slowing price increases and preserving financial stability, the Fed hopes that tightening lending practices taken up by private sector banks in response to the financial distress will cool the economy on its own accord, allowing the central bank to forego raising rates while still bringing down inflation.