Fed Raise Interest Rates Despite Bank Collapse

Facts

• The Federal Reserve raised interest rates for the ninth time in a row on Wednesday, aiming to continue combating high inflation despite turmoil in the banking industry following the collapse of two regional banks.¹
• The federal reserve raised overnight lending rates 0.25% to a range of 4.75% to 5%, making interest rates the highest they have been since September 2007.²
• Inflation has fallen significantly since its peak this summer, but it still remains at nearly triple the Fed's goal of 2%.³
• The Federal Reserve has left the possibility of further rate increases open, saying that "additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time."³
• According to a study released earlier this month, nearly 190 banks are at risk of collapse amid high-interest rates and declining asset values. This is because the Fed's interest rate increases, designed to reduce inflation, have also weakened the value of bank assets like government bonds and mortgage-backed securities. This trend also occurred in the failed Silicon Valley Bank in California.⁴
• In a statement about the increase, the Fed worked to reassure the public about the health of the banking system in light of SVB’s collapse, saying that the decision to increase interest rates was unanimous and stating that “[t]he U.S. banking system is sound and resilient."⁵

Sources: ¹NPR Online News, ²CNN, ³ABC News, ⁴USA Today, and ⁵Washington Examiner.

Narratives

• Pro-establishment narrative, as provided by Washington Examiner. The Federal Reserve has taken decisive actions to protect the US economy and restore public confidence in the banking system. Inflation poses a bigger threat to the economy than any repercussions from uncertainty over the banking system — raising interest rates is the right decision.
• Establishment-critical narrative, as provided by NPR Online News. The Federal Reserve needs to stop its rate hikes, at least temporarily, in order to assess the fallout from the collapse of Silicon Valley Bank and Signature Bank earlier this month. Continuing with hikes risks spooking the market, as there is no way the Fed has had time to fully analyze the current landscape of the banking sector or factor recent events into its decision making.
• Narrative C, as provided by CNN. While many people are critical of the Federal Reserve's decision to increase interest rates once again, there really isn't a right solution for the Fed under current circumstances. Inflation is still too high and the labor market is too tight but, on the other hand, they need to make sure to avoid exacerbating issues within the banking system. There is no way the Fed can keep everyone happy.