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The Federal Reserve, undeterred by a string of recent bank failures, on Wednesday raised its key interest rate by 0.25 percent, to a range of 5 to 5.25 percent, the tenth in a steady string of increases starting in January 2022. It did, however, hint that the current series of rate hikes could be paused, at least for now.
“The Fed is stuck between a rock and a hard place,” says Sam Stovall, chief investment strategist at CFRA Research. Inflation remains stubbornly high, yet a series of additional rate hikes may topple a teetering banking system. “By hinting that a pause may be appropriate, since the banking crisis should aid in slowing inflation through the curtailing of lending activity, the Fed may still be able to maintain pressure on inflation without overdoing its rate-tightening stance.”
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Why rates are rising
At the start of the pandemic in 2020, the economy plunged into a brief, sharp recession. The Fed, whose job is to fight inflation and keep the economy growing, slashed its key short-term fed funds rate to near zero to stimulate growth and revive the economy.
But inflation spiked to 8.9 percent in June 2022, boosted by low rates, pent-up demand, supply chain disruptions and, more recently, soaring oil prices caused by Russia’s invasion of Ukraine. To slow the economy and reduce inflation, the Fed began raising interest rates in March 2022.
The Fed’s campaign reduced inflation but didn’t kill it. In March, consumer prices rose 5 percent from a year earlier — down from June’s 41-year high but still well above average. The nation’s jobless rate fell to 3.5 percent, moving the job market closer to the Fed’s goal of maximum employment.
The Fed’s actions may have had an unintended consequence: Two regional banks, Silicon Valley Bank and Signature Bank collapsed in March, partly because of losses from the effect of higher rates on their investments. A third bank, First Republic, collapsed May 1, even after a coalition of banks infused it with cash.