Fed Raises Interest Rates, Possibly For Last Time, Amid Probe Of SVB; Rate Hikes “Were Well Telegraphed And Many Banks Managed To Deal With Them,” Jerome Powell Says
The U.S. Federal Reserve raised interest rates today for the ninth time since last year by an expected 25 basis points, or 0.25%. But Fed chief Jerome Powell indicated slow to no more rate hikes in this latest cycle as a credit crunch following the recent bank crisis may help tame inflation without more Fed action.
That’s mixed news for companies and investors hoping to skirt recession, including media companies looking for an uptick in advertising.
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Tamping soaring inflation down to 2% is still very much the Fed’s objective, Powell said during a press conference after the latest interest rate hike, but he said “there may be other ways to get there.”
The Federal Open Market Committee cautioned in its official statement it “will closely monitor incoming information and assess the implications for monetary policy [and] anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.”
But, the FOMC “will take into account the cumulative tightening of monetary policy [to date], the lags with which monetary policy affects economic activity and inflation, and economic and financial developments” — likely including the collapse of two major regional banks.
After Silicon Valley Bank (SVB) in California and Signature Bank in New York melted down earlier this month, the Fed, Treasury and FDIC rushed to restore confidence in the system, primarily by announcing that the government would backstop all deposits. Normally, any deposits over $250k are not insured, but the announcement was seen as key to avoid a run on other banks.
The volatile and slightly confused stock market still hoping for a soft landing perked up slightly late in the trading session on Powell’s comments. But stocks got slammed just before the close. That could be on a closer reading of Powell’s comment and/or Treasury Secretary Janet Yellen’s separate afternoon testimony to a Senate subcommittee that the FDIC is not considering providing “blanket insurance” for bank deposits.
Powell said the Fed is examining bank oversight and supervision. ”At a basic level, Silicon Valley Bank management failed badly. They grew quickly, accumulating interest rate and liquidity risks, and didn’t hedge those risks,” he said, leading to “a rapid and massive bank run by a large group of connected depositors.”
“My only interest is that we identify what went wrong here. How did that happen, and what are the right policies to put in place?” He declined to comment on what the measure might entail.
Powell is taking some heat for the Fed’s sparking the crisis by raising interest rates too high too fast. He pushed back, noting the hikes had been signaled “and this still happened.”
“Our rate hikes were well telegraphed to the market and many banks have managed to deal with them.”
Overall, he said, “Our view is that the banking system is sound, it’s resilient, has powerful liquidity.”
A sort-of benefit — tighter credit conditions caused by renewed bank skittishness to lend, may help reduce inflation, he said.
Sen. Elizabeth Warren recently slammed Powell at a Capitol Hill hearing, saying his push to slower economy on the quest for lower inflation goes hand-in-hand with lower employment, meaning people could be thrown out of work by the Fed’s high interest-rate regime.
Powell reiterated again today that “we understand our actions” around interest have an impac. But high inflation also hurts the lowest wage earners, he noted.
He said the Fed had considered officially pronouncing an outright pause on rate hikes “in the days running up to this meeting…But labor market and inflation [data] came in stronger” than hoped for. So, our decision was to do 25 basis points and change guidance from ‘ongoing hikes’ to ‘some additional hikes’” possible.
The DJIA ended down 530 points or 1.63%. The Nasdaq fell 1.6% and the S&P 500 by 1.65%. Media and tech stocks followed indexes down late in the session. WBD and Netflix closed off nearly 4%, Paramount by 3%, Comcast and Disney by 2%. Many had regained some ground in after-market trading. Alphabet, Apple, Meta and Amazon closed 1% to 2% lower.
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