The recent collapse of Silicon Valley Bank and Signature Bank and broader international financial volatility have complicated the Federal Reserve’s decision to raise the target federal funds rate by 0.25%. Despite this, the Federal Open Market Committee believes the financial system is resilient, and policymakers have decided to hike interest rates.
Increasing the cost of borrowing money through raising interest rates is a measure to reduce inflationary pressures. This measure leads consumers and businesses to take on less debt. However, the decision to hike interest rates has become more complicated due to the collapse of Silicon Valley Bank and Signature Bank. Silicon Valley Bank had to sell a bond portfolio at a loss, which caused account holders to withdraw their funds. The Federal Deposit Insurance Corporation insured all the accounts to avoid bank runs at other firms.
Due to the robust labor market and persistent inflation in certain areas, Federal Reserve Chair Jerome Powell has stated that policymakers will gradually increase target interest rates. However, household wages have declined in the past two years, even with low unemployment rates. Recent indicators of moderate spending and production growth, solid job gains, and low unemployment rates were the basis for the decision to hike interest rates. Nevertheless, the elevated inflation rate of 6.0% in February 2023 remains a concern. While the decision was based on recent indicators of moderate growth in spending and production, substantial job gains, and low unemployment rates, the elevated inflation rate of 6.0% in February 2023 remains a concern.
Although recent events have resulted in tighter credit conditions that may affect economic activity, hiring, and inflation, the Federal Reserve’s decision to hike interest rates indicates confidence in the financial system’s resilience. The impact of the collapse of Silicon Valley Bank and Signature Bank on the Federal Reserve’s decision highlights the importance of monitoring financial stability in a constantly evolving global market.
