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| Federal Reserve Considers Rate Hikes Amid Banking Uncertainty and Silicon Valley Bank Collapse |
The US Federal Reserve is considering further rate hikes as American banks deal with the uncertainty triggered by the collapse of Silicon Valley Bank (SVB). Experts predict that the Fed will increase its benchmark lending rate by 25 basis points to a range of 4.75-5.00 percent, marking the ninth increase since it began tightening monetary conditions last year. The hike would be in line with the size of the US central bank’s previous rate hike in February. Despite these efforts, price rises remain well above the Fed’s long-term inflation target of 2%.
SVB’s collapse led to a squeeze on banking stocks around the world, and analysts predict that the Fed will continue with a more modest hiking cycle than was previously predicted. Treasury Secretary Janet Yellen noted that the US banking sector is “stabilizing” after the failures of SVB and Signature Bank, but acknowledged that “similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion.”
The VIX, Wall Street’s favourite volatility gauge, saw its biggest two-day decline since May as some of the fear of further contagion dissipated. The challenge for Fed Chair Jerome Powell on Wednesday will be to convey the message that the banking system has turned a corner while continuing to confront inflation. The Fed is likely to be “a bit more dovish” in the language that accompanies the decision, according to Stephen Juneau, Senior US Economist at Bank of America Global Research. Juneau expects the US central bank to reinforce its confidence in the banking system in the statement. The Fed will also update its GDP growth and interest-rate projections on Wednesday.
