US Fed delivers small rate hike amid global banking turmoil
The Federal Reserve on Wednesday raised interest rates by a quarter of a percentage point, but indicated it was on the verge of pausing further increases in borrowing costs after the recent collapse of two US banks.
Fed Chair Jerome Powell sought to reassure investors about the soundness of the banking system, saying that the management of Silicon Valley Bank "failed badly," but that the bank's collapse did not indicate wider weaknesses in the banking system.
"These are not weaknesses that are running broadly through the banking system," he said, adding that the takeover of Credit Suisse seemed to have been a positive outcome.
The Federal Open Market Committee policy statement also said the US banking system is "sound and resilient."
Even so, Wall Street ended sharply lower after Powell told a news conference that officials were still intent on fighting inflation while also eying the extent to which recent bank failures had cooled demand and slowed lending.
The much-anticipated rate hike by the Fed, which had delivered eight previous rate hikes in the past year, sought to balance the risk of rampant inflation with the threat of instability in the banking system.
But in a key shift driven by the sudden failures this month of Silicon Valley Bank (SVB) and Signature Bank, the Fed's latest policy statement no longer says that "ongoing increases" in rates will likely be appropriate.
The banking sector has been in turmoil after California regulators on March 10 closed Silicon Valley Bank in the largest US bank failure since the 2008 financial crisis.
The collapse of the Santa Clara, California-based bank and Signature Bank, another US midsized lender, prompted a rout in banking stocks as investors worried about other ticking bombs in the banking system and led to UBS Group AG's takeover of 167-year-old Credit Suisse Group AG to avert a wider crisis.
The Fed's relentless rate hikes to rein in inflation are among factors blamed for the biggest banking sector meltdown since the 2008 financial crisis.
"The Fed is now living on a hope and a prayer that they haven’t done irreparable harm to the banking system," said Brian Jacobsen, senior investment strategist at Allspring Global Investments in Menomonee Falls, Wisconsin. "The Fed is probably thinking financial stresses are substituting for future rate increases."
Meanwhile, as beleaguered First Republic Bank considers its options, Treasury Secretary Janet Yellen said on Wednesday there is no discussion on insurance for all deposits.
She told a congressional hearing that the government "is not considering insuring all uninsured bank deposits." She also said the Treasury Department has not considered anything to do with guarantees for assets. First Republic shares closed down more than 15 percent.
As officials grapple with restoring confidence in the banking system, JPMorgan Chase & Co CEO Jamie Dimon is scheduled to meet with Lael Brainard, the director of the White House's National Economic Council, during the executive's planned trip to Washington, according to a person familiar with the situation.
Bank supervision
The latest move to restore calm to restive regional bank stocks came as Pacific Western Bank, one of the regional lenders caught up in the market volatility, said it had raised US$1.4 billion from investment firm Atlas SP Partners.
Shares of the bank closed down 17 percent even as it tried to assuage investor worries by saying it had more than US$11.4 billion in cash as of March 20.
But less than two weeks after Silicon Valley Bank sank under the weight of bond-related losses due to surging interest rates, the CEO of hedge fund Man Group, Luke Ellis, said the turmoil was not over and predicted further bank failures.
Policymakers from Washington to Tokyo have stressed the turmoil is different from the crisis 15 years ago, saying banks are better capitalized and funds more easily available.
SVB's collapse kicked off a tumultuous 10 days for banks which led to the 3 billion Swiss francs (US$3.2 billion) weekend takeover of Credit Suisse by rival UBS.