The US central bank has increased interest rates despite concerns that this could exacerbate financial instability following a spate of bank failures.
The Federal Reserve raised its key rate by 0.25 percentage points, while praising the banking system as “sound and resilient”. However, it also warned that the impact of the bank failures could hurt economic growth in the coming months.
The Fed has been increasing borrowing costs to stabilize prices, but the sharp rise in interest rates since last year has strained the banking system.
Silicon Valley Bank and Signature Bank are among two US banks that have recently collapsed, in part due to difficulties caused by higher interest rates. Although authorities worldwide do not believe these failures pose a significant threat to financial stability, they stress the need to address inflation.
Last week, the European Central Bank raised its key interest rate by 0.5 percentage points, and the Bank of England is set to announce its own interest rate decision after official figures revealed unexpected inflation spikes in February.
Despite these challenges, Federal Reserve Chairman Jerome Powell has stated that the Fed remains committed to controlling inflation. While he describes Silicon Valley Bank as an “outlier” in an otherwise strong financial system, he acknowledges that the recent instability could hinder growth, although the full extent of the impact is unclear.
