Fed raises interest rates 0.25%, escalating inflation fight amid banking woes

(WASHINGTON) — The Federal Reserve on Wednesday raised its short-term borrowing rate another 0.25%, escalating the central bank’s attack on inflation just two days after the forced sale of First Republic Bank.

The Fed’s 10th consecutive rate increase arrives less than a week after fresh government data showed that U.S. economic growth slowed over the first three months of this year.

Despite the economic turbulence, the central bank appears dedicated to tightening its grip on prices.

Inflation has fallen significantly from a summer peak though it remains more than double the Fed’s target of 2%.

Speaking in Washington, D.C., on Wednesday, Fed Chair Jerome Powell reasserted the central bank’s commitment to cooling price increases but left open the possibility that the Fed could pause increases at its next meeting.

“Inflation pressures continue to run high,” Powell said. “The process of getting inflation back down to 2% has a long way to go.”

In response to a question about additional rate hikes, Powell noted the removal of a sentence that appeared in the Fed’s previous rate hike announcement in March that said “some additional policy increases might be appropriate.”

Powell described the omission in the announcement on Wednesday as “meaningful,” saying a decision about any additional rate hikes would be “data dependent.”

Increases in the Fed’s benchmark interest rate have contributed to the financial emergency facing U.S. banks.

As the Fed aggressively hiked interest rates over the past year, the value of long-term Treasury and mortgage bonds dropped, punching a hole in the balance sheets at some banks.

Three of the nation’s 30-largest banks have failed since March. While high interest rates contributed to the collapses, each of the banks also retained a sizable portion of uninsured depositors, who tend to panic without a government backstop for their funds.

The announcement on Wednesday raises the benchmark rate to a target range of 5% to 5.25%.

In a statement, the Fed affirmed the stability of the financial system but acknowledged the distress would likely cool the lending environment.

“The U.S. banking system is sound and resilient,” the central bank said. “Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain.”

The Fed has put forward a series of borrowing cost increases as it tries to slash price hikes by slowing the economy and choking off demand. The approach, however, risks tipping the U.S. economy into a recession and putting millions out of work.

Data released last week showed that economic growth slowed at the outset of this year, suggesting the rate hikes have helped put the brakes on business activity.

U.S. gross domestic product grew by a 1.1% annualized rate over the three months ending in March, according to government data released Thursday.

The data marked a slowdown from 2.6% growth in the previous quarter. The slowdown resulted from a decline in business investment and residential fixed investment, which includes money spent on home buying and construction, the data showed.

The U.S. added 236,000 jobs in March, which marks strong job growth, but lower than the average of 334,000 jobs added each month over the previous six months, according to government data.

Meanwhile, U.S. retail sales fell moderately in February but remained solid, suggesting that households still retain some pandemic-era savings.