US Central Bank President Jerome Powell confirmed on Wednesday that depositors’ money is “safe” in US banks, while the global banking system is witnessing turmoil after the collapse of US banks.
US Central Bank President Jerome Powell confirmed on Wednesday that depositors’ money is “safe” in US banks, while the global banking system is witnessing turmoil after the collapse of US banks.
And Jerome Powell reminded during a press conference that the US banking system is solid, stressing that the Federal Reserve is “determined to take lessons” from what happened. “We will continue to closely monitor the situation… and we are ready to use all available tools to keep this money safe,” he added.
On Wednesday, the US central bank raised the interest rate by a quarter of a percentage point, as expected, continuing its policy aimed at curbing high inflation, despite the turmoil in the banking sector that may “burden” the economy.
The decision was taken unanimously. With this increase, the interest rate is now in the range of 4.75 to 5%, its highest level since 2006.
Likewise, the Federal Reserve expected that the inflation rate this year would be slightly higher than it expected in December, at 3.6% compared to 3.5%, while it expected the gross domestic product to decline by 0.4% compared to 0.5% for the year 2023. And by 1.2% compared to 1.6% for the year 2024.
The Central Bank also warned in a statement that the recent banking crisis “is likely (…) to burden economic activity, employment and inflation,” noting that “the size of these effects is uncertain.”
However, he reaffirmed that “the US banking system is solid and resilient” and that the committee in charge of monetary policy “is still alert to inflation risks.”
Federal Reserve officials predicted additional rate hikes in the coming months, citing “additional tightening measures,” without elaborating.
Mixed expectations
And expectations for raising US interest rates varied greatly in recent weeks, from the opinion that they will be raised strongly after Powell’s statements about inflation, and from the expectation that they will not be raised in light of the repercussions of the recent banking crisis.
The collapse of Silicon Valley Bank (SVB), Signature Bank and Silvergate has sparked a wave of anxiety. Governments, central banks and regulators intervened urgently to try to restore confidence in the banking sector to avoid spreading panic.
But the Swiss Credit Suisse Bank, which has been facing difficulties for years, paid the price and was acquired on Sunday by the Swiss “UBS” bank as well.
“restore trust”
It seems that calm began to return to the financial sector since Tuesday. After two sessions during which the European stock exchanges rose, these markets were hovering around a state of balance on Wednesday.
“It seems that the pressure on the banking sector’s bonds has begun to ease after the regulatory bodies’ measures to restore confidence,” said Rubila Farooqi, chief economist at the specialized “HFE” group, but she does not exclude the risk of “fear of new bankruptcies.”
And the Federal Reserve lent about $ 164 billion to American banks in a few days, so that any customer who wanted to withdraw his money could do so, in addition to $ 142.8 billion to the two entities created by the American regulators that will succeed the two bankrupt banks.
In contrast to the Fed’s anti-inflation, these loans have increased its balance sheet by $297 billion which it has been trying to cut since June.
Like the European Central Bank?
“Raising rates today would be a mistake,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics, because “the Fed has done enough to bring inflation back on target, and we can’t tell if the threats against the banking system are over.”
Especially since the collapse of these banks was driven by the raising of interest rates by the Federal Reserve, which jumped at an unprecedented rate since the beginning of the eighties, during the period of very high inflation that the United States witnessed at that time.
The US central bank is under increasing pressure with the European Central Bank raising interest rates by 0.50 percentage points Thursday, while confirming that it will not compromise between price stability and financial stability.
And on Wednesday, European Central Bank President Christine Lagarde announced that the recent tensions surrounding the banking sector pose “new risks” to the economy, at a time when the bank still has a “long way” to combat high inflation.
In the United Kingdom, inflation rose in February to more than 10%, mainly due to the new increase in food prices amid the cost of living crisis.
