Fed raises interest rates another 0.25 points despite recent bank failures

Despite the recent turmoil in the banking industry, the Federal Reserve on Wednesday raised its benchmark interest rate by a quarter of a percentage point to a range of 4.75% to 5%.

Language in the Fed’s release following the rate-setting meeting indicated that the Fed may be softening its approach to fighting inflation in the coming months. Instead of a clear indicator of future hikes, the Fed said “some additional policy firming may be appropriate.”

Additionally, Fed officials released their economic projections for the coming years, which indicate that many support the idea of one additional hike to bring the interest rate range near 5% to 5.25%, the target rate projected in December.

Fed Chair Jerome Powell indicated in February, when rates also increased 0.25 points, that the fight to subdue inflation was not over yet. That led many to believe that the rate hikes would continue further into 2023.

Inflation remained elevated last month, as prices rose 6% on an annual basis and 0.4% from January to February. The labor market added 311,000 jobs in February and unemployment rose to 3.6%.

Although some people use these figures as a bellwether for predicting the health of the economy, University of Missouri economics professor Joseph Haslag explained that the situation cannot be solely interpreted from these monthly reports. There is still a long road ahead in the fight to tame inflation, but Haslag advises patience with the process.

“Some months it's going to go up,” Haslag said. “There's going to be some volatility. It's not all going to just go from 8% down to 2%. It's going to take time.”

Since the Fed’s last rate-setting meeting, the U.S. has seen two of the largest bank failures, causing some investors to fear the credit tightening that is expected to follow.

However, the Fed has taken measures to soften the blow of these failures, creating an expansive emergency lending program to prevent bank runs. Haslag does not expect a widespread crisis in the banking system.

“Do I see a crisis? That's not where I put my guess," Haslag said. “ I don’t see that there's a contagion that's just bubbling under the surface.”