Federal Reserve News: Fed Raises Rates Amid Banking Turmoil (2024)

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Here’s what to know about the Fed’s decision.

Here’s what to know:

• Jerome H. Powell, the Fed chair, took questions from reporters about the central bank’s decision to raise rates for a ninth consecutive meeting. Mr. Powell says that the Fed “considered” pausing interest rates because of the banking problems, but said that the economic data had been strong, underscoring the tough spot the central bank is in.

• In its latest economic projections, Fed officials now expect economic growth to be slightly slower this year, and inflation slightly higher, than they predicted in December. They also forecast raising interest rates to 5.1 percent by the end of 2023, before coming down to 4.3 percent by the end of 2024. Mr. Powell said that “a pathway still exists” to a soft-landing — in which the Fed cools the economy without tipping it into recession — “and we’re trying to find it.”

• Mr. Powell said that the American banking system was “sound and resilient,” and that the Fed was prepared to use all of its tools to keep it safe. He said that officials were ready to learn from the collapse of Silicon Valley bank, a likely nod to the fact that the Fed was the failed bank’s primary regulator, and it didn’t address problems at the lender before it was too late. “It is clear we do need to strengthen supervision and regulation” of banks, he said.

• The Fed’s post-meeting statement acknowledged the effects of problems in the banking sector, noting that “recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation.” Mr. Powell said that the effect of the tumult at banks could be considered “equivalent” to a rate increase, given the impact it could have on the economy. He added that deposit flows at banks had “stabilized.”

• Stocks rose immediately after the rate announcement, but the rally soon faded and the S&P 500 index tumbled to a loss at the close of trading. The two-year Treasury yield, which is sensitive to changes in interest rates, fell sharply to around 4 percent. That implies that investors think Wednesday’s interest-rate move could be the Fed’s last for a while, despite policymakers’ projections for one more increase.

The S&P 500 rose sharply soon after the decision was announced, before eventually falling 1.7 percent for the day.

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Seven takeaways from a big day for the Fed.

• By raising rates, the Fed is continuing its fight against inflation but holding off on a more aggressive rate move that might spook markets after weeks of bank turmoil.

• Officials forecast that they will lift borrowing costs to 5.1 percent in 2023. That is unchanged from their December forecasts, and implies one more rate increase this year.

• Inflation has surprisingly been stubborn, which Mr. Powell referred to repeatedly during his news conference.

• Bank turmoil is expected to slow lending and credit availability, and that could cool the economy. By how much is “uncertain,” Mr. Powell said.

• Officials see inflation easing to 3.3 percent by the end of the year, down from 5.4 percent in the last reading.

• The Fed is prepared to answer tough questions about its oversight of Silicon Valley Bank, which collapsed this month and sent tremors through the financial system. An internal review had been ordered, and Mr. Powell said he welcomed scrutiny of what went wrong.

• The upshot? The Fed thinks it has more work to do in wrangling rapid price increases, but it is also navigating a fraught moment as problems in the banking system hang over the economy — and the central bank’s policy path.

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So what happens to C.D.s if a bank fails? The C.D. holder would receive their money and accrued interest up until the day of the failure, said Ken Tumin, founder of DepositAccounts.com, part of LendingTree. But even if a bank found a buyer, the new owner may not choose to continue existing C.D.s. – in that case, consumers would need to find another place for their money, he added.

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He says the Fed’s review of oversight of the bank will focus on what happened and what went wrong, and that “it is clear we do need to strengthen supervision and regulation” of banks.

“This is a bank that was an outlier,” he says, pointing to the bank's large share of uninsured deposits and holdings of long-term bonds.

The upshot of this exchange is that Powell is casting Silicon Valley Bank’s problems as essentially unique, and not a reason to panic about the rest of the banking system, even as he acknowledges the need for better bank supervision and regulation.

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This is noteworthy, because Wall Street economists are trying to guess how much of a change in credit conditions the bank issues equate to. Some, like Goldman Sachs, have estimated one to two rate moves. Others have suggested more. Powell seems to be with the former camp.

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“They do sound more nervous — they’re not writing this off as a couple of banks, idiosyncratic issues,” Ms. Misra said.

The most pessimistic forecast for economic growth in this month’s report is -0.2 percent for the year. In December, the bottom edge of the forecast was -0.5 percent.

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The Fed’s Summary of Economic Projections now suggests a median estimate of 0.4 percent growth in the economy this year, down from the 0.5 percent projection in December.

The projected inflation rate for the year is now 3.3 percent, up from 3.1 percent in December. That’s using the Fed’s preferred measure of inflation, the personal consumption expenditures index.

But in a sign of the resilience of the labor market, the Fed’s median projected unemployment rate for the year was 4.5 percent, down from 4.6 percent in December.

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On Capitol Hill, the call for the F.D.I.C. to insure more deposits heats up.

Some lawmakers, including Senator Elizabeth Warren, Democrat of Massachusetts, have suggested lifting the deposit cap altogether, while others including Representative Ro Khanna, Democrat of California, are pushing to introduce bipartisan legislation that would increase the deposit cap, at least temporarily, on transaction accounts, which are used for activities like payroll, with an eye on smaller banks.

“I’m concerned about the danger to regional banking and community banking in this country,” Mr. Khanna said. He noted that if regional banks lose deposits as people turn to giant banking institutions that are deemed too big to fail, it could make it harder to get loans and other financing in the middle of the country, where community and regional banks play a major role.

While such a move could help to calm nervous depositors, it could also have drawbacks, including removing a big disincentive for banks to take on too much risk.

Such a move would potentially reprise a playbook used during the 2008 financial crisis and authorized at the onset of the coronavirus pandemic in 2020 to prevent depositors from pulling their money out.

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The collapse of Silicon Valley Bank puts the Fed under scrutiny.

• In 2021, a Fed review of the bank found serious weaknesses in how it was handling key risks.

• By July 2022, Silicon Valley Bank was in a full supervisory review. It was rated deficient for governance and controls and placed under a set of restrictions that prevented it from growing through acquisitions.

• Last fall, staff members from the San Francisco Fed met with senior bank leaders about their ability to gain access to enough cash in a crisis and possible exposure to losses as interest rates rose.

• By early 2023, the bank was in what the Fed calls a “horizontal review,” an assessment meant to gauge the strength of risk management. That checkup identified additional deficiencies.

In early March, Silicon Valley Bank faced a run and failed, sending shock waves across the broader American banking system that led to a sweeping government intervention meant to prevent panic from spreading.

Questions have been raised about why regulators failed to spot problems and take action early enough to prevent Silicon Valley Bank’s downfall.

The Fed has initiated an investigation into what went wrong with the bank’s oversight, headed by Michael S. Barr, the Fed’s vice chair for supervision. His review will focus on key questions, including why the problems identified by the Fed did not stop after the central bank issued its first set of warnings.

Lawmakers are also digging into what went awry: The House Financial Services Committee has scheduled a hearing on March 29.

“It’s a failure of supervision,” said Peter Conti-Brown, an expert in financial regulation and a Fed historian at the University of Pennsylvania. “The thing we don’t know is if it was a failure of supervisors.”

Jerome Powell is likely to be grilled over Silicon Valley Bank’s demise.

Many of the bank’s weaknesses seem, in hindsight, as if they should have been obvious to its regulators at the Fed.

Governors at the Fed Board in Washington allowed the bank to merge with a small bank in June 2021, after the first warning signs had surfaced and just months before Fed supervisors in San Francisco began to issue a volley of warnings about the company’s poor risk management. In 2022, the Fed repeatedly flagged problems to executives and barred the firm from growing through acquisition.

But the Fed did not react decisively enough to prevent the bank’s problems from leading to its demise, a failure that has sent destabilizing jitters through the rest of the American financial system.

Mr. Powell is likely to face several questions:

• What went wrong?

• Did examiners at the Federal Reserve Bank of San Francisco fail to flag risks aggressively enough?

• Did the Fed’s board fail to follow up on noted weaknesses?

• Or was the lapse indicative of a broader problem — that is, did existing rules and oversight make it difficult to quickly address important flaws?

In the wake of Silicon Valley Bank’s collapse, how bank oversight is performed at the Fed could be in for some changes.

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What Fed rate moves mean for mortgages, credit cards and more.

Here’s how rising rates affect consumers.

Credit Cards

Credit card rates are closely linked to the Fed’s actions, so consumers with revolving debt can expect to see those rates rise, usually within one or two billing cycles. The average credit card rate was 20 percent as of March 15, according to Bankrate.com, up from around 16 percent in March last year, when the Fed began its series of rate increases.

Car Loans

Car loans tend to track the five-year Treasury note, which is influenced by the Fed’s key rate — but that’s not the only factor that determines how much you’ll pay.

A borrower’s credit history, the type of vehicle, loan term and down payment are all baked into that rate calculation. The average interest rate on new-car loans was 6.95 percent in February, according to Edmunds, up about a percentage point from six months earlier.

Student Loans

Whether the rate increase will affect your student loan payments depends on the type of loan you have.

The rate for current federal student loan borrowers isn’t affected because those loans carry a fixed rate set by the government.

But new batches of federal loans are priced each July, based on the 10-year Treasury bond auction in May. Rates on those loans have already jumped: Borrowers with federal undergraduate loans disbursed after July 1 (and before July 1, 2023) will pay 4.99 percent, up from 3.73 percent for loans disbursed the year-earlier period.

Borrowers of private student loans should also expect to pay more: Both fixed- and variable-rate loans are linked to benchmarks that track the federal funds rate. Those increases usually show up within a month.

Mortgages

Rates on 30-year fixed mortgages don’t move in tandem with the Fed’s benchmark rate, but instead generally track the yield on 10-year Treasury bonds, which are influenced by a variety of factors, including expectations around inflation, the Fed’s actions and how investors react to all of it.

After climbing above 7 percent in November, for the first time since 2002, mortgage rates dipped close to 6 percent in February before drifting back up to 6.6 percent last week, according to Freddie Mac. The average rate for an identical loan was 4.2 percent the same week in 2022.

Other home loans are more closely tethered to the Fed’s move. Home equity lines of credit and adjustable-rate mortgages — which each carry variable interest rates — generally rise within two billing cycles after a change in the Fed’s rates.

Savings Vehicles

Savers seeking a better return on their money will have an easier time — yields have been rising, but not uniformly.

An increase in the Fed’s key rate often means banks will pay more interest on their deposits, though it doesn’t always happen right away. They tend to raise their rates when they want to bring more money in, and recent turmoil in the financial industry may push banks to raise rates to convince anxious depositors to keep money in their accounts.

Rates on certificates of deposit, which tend to track similarly dated Treasury securities, have been ticking higher. The average one-year C.D. at online banks was 4.6 percent at the start of March, up from 0.7 percent a year earlier, according to DepositAccounts.com.

How the banking crisis has already had the same effect as a Fed rate increase.

The central bank has been clear that this could lead to economic pain. Although the Fed would never welcome a banking crisis, the turbulence could lead to a sharp pullback in bank lending, slowing the economy.

On Wednesday, Fed officials nodded to pressure from the bank tumult. “Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation,” they wrote in a statement. “The extent of these effects is uncertain.”

Shortly after that, Mr. Powell said at a news conference that the bank turmoil had the “equivalent” impact of at least one quarter-point rate increase. He quickly noted that it’s too early to know how much the bank situation could slow the economy. Nonetheless, the message was clear: Interest rates tightened financial conditions and led to a banking crisis, and now the banking crisis is likely to constrict financial conditions even more.

Torsten Slok, the chief economist at investment manager Apollo, estimated that the recent disruptions have produced tightening equivalent to the Fed raising interest rates 1.5 percentage points, twice the size of the biggest single increase by the Fed last year.

The Fed’s target interest rate is now set to a range of 4.75 to 5 percent. Investors were recently betting that the Fed would raise rates to around 5.5 percent, but these expectations have since fallen to a peak of around 5 percent, not much higher than current rates — an acknowledgment of the effect of the bank stress.

“In other words, over the past week, monetary conditions have tightened to a degree where the risks of a sharper slowdown in the economy have increased,” Mr. Slok said.

Economists at Goldman Sachs said that because lending conditions had already begun to tighten “due to widespread recession fears,” the recent stress in the banking sector was equivalent to a quarter- or half-point increase in rates. The economists added that “the risks are tilted toward a larger effect,” and raised the likelihood of a recession in the next 12 months.

Goldman’s own financial conditions index, which is widely watched on Wall Street, has yet to show a significant tightening stemming from the banking crisis. That’s in part because the index tracks stock and bond prices as a measure of the money available in markets. Stock market indexes have broadly held up despite the declines of some bank stocks, while yields on government bonds, which underpin borrowing costs throughout the economy, have fallen sharply, in part reflecting expectations that the recent turmoil would lead the Fed to lower interest rates in the near future. Bond prices move inversely to yields.

Other market measures have shown the effects of tighter financial conditions, with inflation expectations — a measure of where investors expect inflation to be in the future — falling sharply this month. And credit spreads, which measure the cost of borrowing for companies, have risen.

There is considerable uncertainty about how problems at banks reverberate throughout the broader economy.

Analysts at Deutsche Bank said that a “more modest tightening of bank lending” could shave half a percentage point from economic growth this year, while a “shock” that tightens lending more severely “could easily subtract more than one percentage point.”

When the Fed last released its economic projections, its policymakers penciled in a median forecast of 0.5 percent economist growth in 2023. Those projections will be updated on Wednesday, and if Deutsche’s analysts are correct, it implies that the United States is on the precipice of recession, even if there is modest tightening of financial conditions because of problems at banks.

“As a result, recent events strengthen our conviction that a recession remains the most likely outcome for the economy over the next year,” the analysts noted.

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Why the banking turmoil has complicated rate increases.

Higher rates can depress the value of bonds and similar investments that banks hold. For most banks, those losses will exist only on paper — what are known in the industry as unrealized losses.

But those losses can turn into real ones if lots of customers start withdrawing money from their accounts and banks have to sell assets in order to pay them back — which is what happened at Silicon Valley Bank, the biggest bank to fail since the depths of the 2008 financial crisis.

Here’s a guide to the interest rate risk lurking on bank balance sheets.

The Fed meeting also holds high stakes for Biden.

Economists and investors were watching Wednesday’s decision closely, after the Fed and the administration intervened this month to shore up a suddenly shaky regional banking system following the failures of Silicon Valley Bank and Signature Bank. So were administration officials, who publicly express support for Mr. Powell but, in some cases, have privately clashed with Fed officials over bank regulation and supervision in the midst of their joint financial rescue efforts.

In line with forecasters’ expectations, Fed officials continued their monthslong march of rate increases, in an effort to cool an inflation rate that is still far too hot for the central bank’s liking. But they raised rates by only a quarter of a percentage point, to just above 4.75 percent — a smaller move than markets were pricing in before the bank troubles began.

Some economists and former Fed officials have urged Mr. Powell and his colleagues to continue raising rates unabated, in order to project confidence in the system. Others had called on the Fed to pause its efforts, at least temporarily, to avoid dealing further losses to financial institutions holding large amounts of government bonds and other assets that have lost value amid the rapid rate increases of the past year.

“Under the currently unsettled circ*mstances, the stakes are high,” Hung Tran, a former deputy director of the International Monetary Fund who is now at the Atlantic Council’s GeoEconomics Center, wrote in a blog post this week.

“Disappointing market expectations could usher in additional sell-offs in financial markets, especially of bank shares and bonds, possibly requiring more bailouts,” he wrote. “On the other hand, the Fed needs also to communicate its intention to bring inflation back to its target in the medium term —a difficult but not impossible thing to do.”

Mr. Powell nodded to those concerns in a news conference on Wednesday but suggested that the Fed could sufficiently juggle the tasks of stabilizing the banking system and curbing inflation without crippling economic growth. He and his Fed colleagues declared thatthe banking system was strong in a statement after their meeting, and he downplayed worries that recent bank woes spelled concern for the health of the entire financial system.

Mr. Biden has for nearly a year professed his belief that the Fed could engineer a so-called soft landing as it raises interest rates, slowing the pace of job creation and bringing down inflation but not pushing the economy into recession. That would complete what the president frequently calls a transition to “steady and more stable growth.”

It would also help Mr. Biden as he gears up for a widely expected announcement that he will seek re-election: History suggests that the president would be buoyed by an economy with low unemployment and historically normal levels of inflation in 2024.

Through the beginning of the year, data suggested a soft landing could be in the works. But in recent months, price growth has picked up again. The economy continues to create jobs at a much faster pace than Mr. Biden said last year would be consistent with more stable growth. Fed officials were eyeing a more aggressive inflation-fighting stance before the banking crisis hit.

In his news conference on Wednesday, Mr. Powell said that“there is a pathway” to achieving a soft landing, even though Fed officials now expect growth to be slower this year and inflation to run hotter than they forecast in December.

“I think that pathway still exists,” Mr. Powell said. “And we’re trying to find it.”

Mr. Powell suggested in congressional testimonythis month that the Fed could raise rates by as much as half a percentage point in the two-day meeting that ended on Wednesday. Days later, Silicon Valley Bank failed, followed by Signature Bank. The Fed, the Treasury Department and the Federal Deposit Insurance Corporation announced emergency measures to ensure that the banks’ depositors would have access to all their money, and that other regional banks could borrow from the Fed to prevent the rapid flight of deposits that had doomed Silicon Valley Bank.

Mr. Biden will need further cooperation from Fed officials if more bankfailures, or other events, threaten a full-scale financial crisis. Republicans control the House and appear unwilling to sign on for a potentially large government rescue of the financial system, like the bipartisan bank bailouts during the 2008 financial crisis.

“It’s especially important when you can’t count on Congress,” said Jason Furman, a Harvard economist who led the White House Council of Economic Advisers under President Barack Obama. “We’re going to see the only game in town when it comes to financial stability is the White House and the Fed.”

Administration officials have publicly lauded Mr. Powell since theSilicon Valley Bank failure. Karine Jean-Pierre, the White House press secretary, told reporters this week that there was no risk to Mr. Powell’s position as Fed chair from his handling of financial regulation.

“The president has confidence in Jerome Powell,” she said.

Ms. Jean-Pierre also reiterated the administration’s longstandingrefusal tocomment on Fed interest rate decisions. “They are independent,” she said, adding: “And they are going to make their decision— their monetary policy decision, as it relates to the interest rate, as it relates to dealing with inflation, which are clearly both connected. But I’m just not going to — we’re not going to comment on that from here.”

There was wide debate on what interest rate announcement Mr. Biden should have been hoping to hear on Wednesday afternoon.

Some economists and commentators have pushed the Fed to hold off on raising rates entirely, contending that another increase risks further rattling the banking system — and consumers’ confidence in it.

Liberal senators like Elizabeth Warren, Democrat of Massachusetts, and progressive groups in Washington have urged the same for months but for a far different reason. They argue that continued rate increases could slam the brakes on economic growth and throw millions of Americans out of work, and they saythe real drivers of inflation are corporateprofiteeringand snarled supply chains, which will not be tamed by higher borrowing costs.

SenatorChuck Schumer, Democratof New York and the majority leader,weighed in on the rate increase, saying he was “concerned about its effect on the economy.” He also acknowledged that it was a “very tough decision” with “competing equities on both sides.”

Rakeen Mabud, the chief economist at the GroundworkCollaborative, a liberalpolicy group in Washington, said that “I don’t think the Fed should be touching interest rate hikes with a 15-foot pole.”

“Tanking our labor market is not the way to a healthy economy, is not the way to stable prices,” Ms.Mabud said. “We have an additional imperative this month, which is that aggressive interest rate hikes are exactly what have created some of the instability that we’re seeing” in the financial system.

Other economists, including some Democrats, have urged the Fed to raise rates even more swiftly to beat back inflation as soon as possible.

“The whole reason we have independent central banks is so they think about things on a longer time horizon than the typical White House is able to,” Mr. Furman said. “So I think the Fed, insofar as it did anything to hurt Biden, it was that it raised rates too slowly.”

Karoun Demirjiancontributed reporting.