Federal Reserve increases interest rates amidst US banks’ failure

Despite the instability in the global financial market, the U.S. central bank has hiked its interest rates once again. The Federal Reserve has reportedly increased its rate by 0.25 percentage points. While the institution has warned other banks that this move could hinder economic growth in the upcoming months, it has justified the rise in interest rates by citing the U.S. banking systems as “resilient and sound”.

Part of the reason for the collapse of two mid-sized US banks, Silicon Valley Bank and Signature bank earlier this month was the increase in the interest rates and its associated problems. As the rates increase, it is predicted that the bonds, made in the banks as security, may become less valuable due to this rise.

Industry experts, however, are of the opinion that these failures will not threaten the stability of the financial system, and need to distract from measures to control inflation.

Chief economist at Pantheon Macroeconomics, Ian Shepherdson, has expressed that the interest rate hike is an indicator that the Fed is nervous.

The Federal Reserve chairman, Jerome Powell, stayed firm in his opinion that the bank remains focused on the fight against inflation. He also termed Silicon Valley Bank as an outlier in an otherwise robust financial banking system.

Prior to the failure of the banks, Powell had warned the officials of the need to push up the interest rates in order to bring the situation under control.

An increase in interest rates affects various financial decisions, from buying homes to borrowing capital to set up a business or taking on other debts. The effects of the same could easily be observed in the US housing market. There has been a sharp decline in the purchase of new housing over the past year, with the industry experiencing its sharpest fall in a decade.

Source Credit: https://www.bbc.com/news/business-65041649