The Federal Reserve raised interest rates by a quarter point on Wednesday as it attempts to fight stubbornly high inflation while addressing risks to financial stability.
Investors and economists had widely anticipated the quarter-point increase despite the meltdown in the banking sector.
Still, Federal Reserve Chairman Jerome Powell and policymakers entered their second policymaking meeting of the year surrounded by an unusual level of uncertainty as the landscape surrounding the financial system continues to shift.
The central bank’s mission in battling inflation became much more difficult over the past few weeks as the collapse of several banks meant the Fed had to balance a potential financial crisis alongside high inflation and a tight labor market.
In a statement released at the conclusion of the meeting, Fed officials acknowledged that recent financial market turmoil is weighing on inflation and the economy, though they expressed confidence in the overall system.
“The US banking system is sound and resilient,” they wrote in their policy statement on Wednesday. “Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring and inflation. The extent of these effects is uncertain.”
The Committee, they said “remains highly attentive to inflation risks.”
The banking chaos has stoked fears not just that the central bank could overcorrect the economy into recession but that it could trigger more bank failures, and prominent economists have urged the Fed to pause rate hikes.
That’s partially because rate hikes have undermined the value of Treasuries and other securities, a critical source of capital for most US banks. When Silicon Valley Bank was forced to sell those bonds quickly at a substantial loss, the bank ran into a liquidity crisis and collapsed.