The Federal Reserve announced it raised interest rates by a quarter of a percentage point during its March 22, 2023, Federal Open Market Committee (FOMC) meeting in an effort to lessen inflation. This is the ninth time the Fed has raised interest rates since March 2022 and now puts interest rates in a range between 4.75 percent to 5 percent compared to near zero percent, which is where interest rates were in March 2022.

“My colleagues and I understand the hardship that high inflation is causing, and we remain strongly committed to bringing inflation back down to our 2 percent goal,” Fed Chairman Jerome Powell said. “Price stability is the responsibility of the Federal Reserve. Without price stability, the economy does not work for anyone. In particular, without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all.”

As interest rates rise, rates for credit cards, adjustable-rate mortgages, auto loans, and other types of loans increase, which can slow economic activity. Although on a positive note, interest accrued on savings accounts can also increase. 

Although the Fed’s latest interest rate increase was smaller than expected, the rise in interest rates comes after many lawmakers, economists, and Wall Street urged the Fed to leave interest rates as is due to recent collapses and volatility in the banking sector.

Run on the Banks

Two weeks before the Fed’s March 2023 meeting, Silicon Valley Bank (SVB) experienced the second-largest bank collapse in American history, which many say was related to surging interest rates. SVB’s failure triggered another bank failure, that of Signature Bank. A third bank, Republic Bank, was on the brink of collapse before it was saved by a $30 billion cash infusion fund spearheaded by the nation’s 11 largest banks. 

Senate Banking Chair Sherrod Brown and Sen. Mark Warner were among lawmakers who called for the Fed to halt interest rate hikes ahead of its March 2023 meeting. Sen. Mike Lee wrote on his personal Twitter account (@BasedMikeLee), “END THE FED” over the weekend. It got nearly 15,000 likes and 2,400 retweets. 

The 45-member House Freedom Caucus said earlier in the week, “The Federal Reserve set the conditions for this [banking] crisis.” And Rep. Ayanna Pressley told Politico, “On [Powell’s] watch, we have seen a series of bank failures, deregulatory measures, and reckless interest rate hikes that have all threatened to undermine our economic recovery make our financial system less safe.” 

But it’s not just lawmakers urging the Fed to take a more cautious approach.

Economists are worried that it’s not just the higher interest rates that may slow the economy; they warn that many mid-sized and small banks, in order to conserve capital and avoid a run on the banks like SVB experienced, will become more cautious in their lending. Meaning businesses and consumers will likely find it more difficult to obtain lines of credit or loans, which economists say could tip the economy into a recession.

Concern over the Fed’s policy is not new, nor is this the first time the Fed’s policies surrounding interest rates have been blamed for creating havoc in the economy. The 2008 financial crisis was largely blamed on the Fed’s policy, which ignited protests to “End the Fed.” 

Fed Chairman Jerome Powell said the Fed’s rate-setting committee considered a pause in rate hikes in light of the banking crisis. “We did consider that in the days running up to the meeting,” Powell said in the press conference when asked about a pause.

“In the past two weeks, serious difficulties at a small number of banks have emerged. History has shown that isolated banking problems if left unaddressed, can undermine confidence in healthy banks and threaten the ability of the banking system as a whole to play its vital role in supporting the savings and credit needs of households and businesses,” Powell said.

But ultimately, Powell stressed that the American “banking system is sound and resilient, with strong capital and liquidity.” And noted that the Fed “will continue to closely monitor conditions in the banking system and are prepared to use all of our tools as needed to keep it safe and sound. In addition, we are committed to learning the lessons from this episode and to work to prevent events like this from happening again.”

In the end, Powell said the Fed decided that because inflation remains elevated, there was a strong consensus for an interest rate hike.

“We are committed to restoring price stability and all of the evidence says that the public has confidence that we will do so that will bring inflation down to 2 percent over time. It is important that we sustain that confidence with our actions, as well as our words,” Powell said.

David Kelly, chief global strategist at JPMorgan Asset Management, said the Fed’s decision to raise interest rates a quarter of a percent point in March 2023 indicated the Fed had a “problem pivoting,” and told CNBC he believes the central bank has been too aggressive in raising rates and is “clinging onto hawkishness.”

“Unless they say they are making progress against inflation, then it is getting harder and harder for them to pivot without sounding like they are scared of the banking system,” Kelly said.

Economic Confidence

After the announcement of the interest rate hikes, Powell called Silicon Valley Bank an outlier and said that the Fed was undergoing a review of its oversight of the bank.

“At a basic level, Silicon Valley Bank management failed badly,” Powell said, and noted that the Fed’s vice chair for supervision, Michael Barr, was conducting a probe into how the failure was allowed to happen and what the central bank may have missed.

“The question we were all asking each other over that weekend was, ‘How did this happen?’” Powell said.

Powell emphasized that “The U.S. banking system is sound and resilient.” 

He continued on saying, “We believe, however, that events in the banking system over the past two weeks are likely to result in tighter credit conditions for households and businesses, which would, in turn, affect economic outcomes.” Indicating a possible slowdown in further interest rate increases. 

Although some lawmakers protested further interest rate hikes, Powell isn’t alone in his positive perspective on the issues facing the banks. Washington-based policymakers have stressed the current banking turmoil is different from the financial crisis 15 years ago, noting that banks are better capitalized and funds more easily available today than in 2008.

Additionally, the Fed, Federal Deposit Insurance Corp., and Treasury Department all agreed to insure the full value of deposits at SVB and Signature Bank, including those above the $250,000 cap, in an effort to stabilize the banking industry and the economy. The Fed also created a new lending program to ensure that banks can access cash to repay depositors if needed.

Note that the increase in deposit insurance is limited to SVB and Signature Bank currently. 

While Powell announced the latest interest rate increase, Treasury Secretary Janet Yellen told a Senate committee that she’s not considering expanding the FDIC’s insurance limit of $250,000 to all banks, further rattling Wall Street.

“This is not something we’ve looked at,” she said. “This is not something we are considering.”

Yellen said that during a contagious bank run, the Treasury would likely pursue an exception that would permit the FDIC to protect all deposits, but this would be considered on a case-by-case basis, she told senators.

Inflation Remains Elevated

Inflation is the reason Powell said the Fed ultimately chose to raise interest rates, noting that inflation remains elevated and that the Fed will continue to raise interest rates if needed in order to fight inflation

“I do still think though that there’s, there’s a pathway to [a soft landing],” he added, saying, “I think that pathway still exists, and, you know, we’re certainly trying to find it.”

“The Fed’s monetary policy actions are guided by our mandate to promote maximum employment and stable prices for the American people,” Powell said. “My colleagues and I are acutely aware that high inflation imposes significant hardship as it erodes purchasing power, especially for those least able to meet the higher costs of essentials like food, housing, and transportation.” 

Powell stressed that it is “too soon to determine the extent of these effects and therefore too soon to tell how monetary policy should respond. As a result, we no longer state that we anticipate that ongoing rate increases will be appropriate to quell inflation; instead, we now anticipate that some additional policy firming may be appropriate.”

Powell openly disagreed with economic predictions that the Fed would reverse course and begin to cut interest rates in 2023. However, Powell did acknowledge that if the economy continues to evolve as projected, the federal funds rate would likely increase to 5.1 percent by the end of 2023, indicating that just one more quarter of a percentage point increase would occur in 2023.

He indicated that interest rate cuts would likely come in 2024, with the Fed attempting to cut interest rates to 4.3 percent and down to 3.1 percent at the end of 2025, but Powell made sure to leave room for the Fed to deviate from this plan based on how the economy performs.

“We understand that our actions affect communities, families, and businesses across the country,” Powell stressed. “Everything we do is in service to our public mission.”