US Fed makes low interest rate hike decision amid global banking turmoil

SARAJEVO, (Patria) - The Federal Reserve raised interest rates by a quarter of a percentage point on Wednesday, but indicated it was on the verge of pausing further increases in borrowing costs after the recent collapse of two US banks, Reuters reports.

Fed Chair Jerome Powell sought to reassure investors about the stability of the banking system, saying Silicon Valley Bank (SVB) management had "badly failed" but that the bank's collapse did not indicate wider weaknesses in the banking system. "These are not weaknesses that are spreading through the banking system," he said, adding that the takeover of Credit Suisse appeared to be a positive outcome. The Federal Open Market Committee's policy statement also stated that the US banking system is "sound and resilient."

Regardless, Wall Street plunged after Powell told a news conference that officials remained committed to fighting inflation, while also assessing how much recent bank failures had cooled demand and slowed lending. The Fed's long-awaited rate cut, which followed eight previous rate hikes over the past year, sought to balance the risk of rampant inflation with the threat of banking system instability. But in a key shift prompted by the sudden failures of SVB and Signature Bank, the Fed's latest statement no longer says that "ongoing increases" in rates will likely be appropriate.

The banking sector has been in turmoil since California regulators shut down SVB on March 10 in the largest US bank failure since the 2008 financial crisis. The collapse of Santa Clara, California-based SVB and Signature Bank, another US mid-sized lender, sent bank stocks tumbling as investors worried about other ticking time bombs in the banking system and led to UBS Group AG acquiring the 167-year-old Credit Suisse Group AG to prevent a wider crisis. The Fed's relentless interest rate hikes to curb inflation are one of the factors blamed for the biggest banking sector crash since the 2008 financial crisis.

"The Fed is now living on hope and prayer that they haven't done irreparable damage to the banking system," said Brian Jacobsen, senior investment strategist at Allspring Global Investments in Menomonee Falls, Wisconsin. "The Fed probably thinks that financial stresses are substituting for future rate increases," he added.

Meanwhile, as First Republic Bank considers its options, Treasury Secretary Janet Yellen said on Wednesday there were no discussions about insuring all deposits. She told a congressional hearing that the government was "not considering insuring all uninsured bank deposits." She also said the Treasury Department had not considered any links to asset guarantees. First Republic Bank shares fell more than 15%. As officials struggle to restore confidence in the banking system, JPMorgan Chase & Co CEO Jamie Dimon is expected to meet with Lael Brainard, director of the White House National Economic Council.

Bank Oversight

The latest move to restore calm to jittery regional bank stocks came as Pacific Western Bank, one of the regional lenders caught in market volatility, said it had raised $1.4 billion from investment firm Atlas SP Partners. The bank's shares fell 17% even as it tried to allay investor concerns by saying it had more than $11.4 billion in cash as of March 20. But less than two weeks after SVB sank under the weight of bond losses due to rising interest rates, hedge fund CEO Luke Ellis said the turmoil was not over and predicted further bank failures.

Policymakers from Washington to Tokyo have stressed that the turmoil differs from the crisis 15 years ago, saying banks are better capitalized and funding is more readily available. The collapse of SVB triggered a tumultuous 10 days for banks, leading to the takeover of Credit Suisse by rival UBS for 3 billion Swiss francs. Over $95 billion in market value was wiped out in 2 weeks. A conservative Republican and a progressive Democrat in the US Senate are introducing legislation that would replace the Fed's internal watchdog with one appointed by the president, aiming to tighten bank oversight following the failures of SVB and Signature Bank. Republican Rick Scott and Democrat Elizabeth Warren have blamed regulatory failures at the US central bank, which has so far operated with an internal inspector general responsible to the Fed's board, for the collapse of the two banks. The Fed was not available for comment. The European Central Bank (ECB) says it will watch for signs of stress in bank lending, a day after warning banks not to be caught out by rising interest rates.

As investors wonder if the ECB can continue with its own interest rate hikes to combat inflation, its chief economist Philip Lane said market jitters may prove to be a "non-event" for monetary policy, while a full-blown crisis that completely changes the outlook is unlikely, Reuters concludes.