- Powell “We initially considered freezing, but reflected the inflation situation”
On the 22nd (local time), the US Federal Reserve (Fed) raised its benchmark interest rate by 0.25%p, taking the second consecutive “baby step”. This brought the Fed's interest rate to its highest level since September 2007.
On this day, the Fed held a regular meeting of the Federal Open Market Committee (FOMC) and announced that it would raise the base rate by 0.25%p from 4.5-4.75% to 4.75-5%. As employment has shown brisk this year, there was a prospect that the Fed would raise the base rate by 0.5%p while maintaining a tightening stance. However, the Fed continued its stance of raising interest rates, taking into account the situation in which inflation is still maintained high.
The Fed started with a 0.25%p hike in March last year and took a big step in May of the same year. In June, July, September, and November of the same year, the base rate was raised by 0.75%p each, making an unprecedented four consecutive giant steps. Since then, as the pace of inflation has slowed since the second half of last year, the extent of the increase was adjusted to 0.5%p in December last year and 0.25%p in February this year.
On the background of the 0.25 percentage point increase in a statement, the Fed said, “Recent indicators of spending and production are showing moderate growth, and jobs are moving at a solid pace with job growth in recent months.” condition,” he explained.
Initially, there were observations that the Fed would raise the rate again as inflation slowed and employment was brisk. In fact, on the 7th, Fed Chairman Jerome Powell appeared at the US Senate Banking Committee hearing and said, “If economic indicators require a faster rate of monetary tightening, we are prepared to increase the pace of rate hikes.”
However, the situation changed with the crisis of the provincial banks in the United States. With the recent bankruptcy of SVB and Signature Bank and rumors of a crisis in the First Republic Bank, the Fed's aggressive rate hike has been pointed out as the cause of financial instability. In response, the financial sector even raised the possibility of interest rate freeze or cut at the FOMC this month.
At a press conference on the same day, Chairman Powell also said that he had considered freezing interest rates in consideration of the stability of the banking system. “We considered suspending interest rate hikes this time, but as prices continued to rise, we decided to continue tightening,” he said. The Fed has compromised between two goals: financial stability and inflation reduction.
"While the US banking system is sound and resilient, recent developments have made credit conditions more stringent for households and businesses, potentially putting further strain on economic activity, employment and inflation," the Fed said in a statement. "The Fed is very cautious about inflation risk because it is uncertain whether it will have an impact."
The dot plot, an indicator of FOMC members' expectations for a rate hike, was 5.1% at the end of this year. This is at the same level as the previous FOMC forecast held in December last year. According to the FOMC's forecast, there is a high possibility that the rate will be raised at the same level as the baby step once more and the interest rate will stop above this year. In fact, the market is predicting that the Fed will stop raising interest rates in the first half of this year.
However, Chairman Powell replied, “I do not expect a rate cut this year” to the question, “If the intensity of tightening weakens, it is possible to cut interest rates this year.” Regarding the previously announced February consumer price index (CPI) slightly slowing to 6% compared to the same month last year, he replied, “There is no sign of a lower core price than last month,” and “it is not time to change monetary policy hastily.”
The stock market, which expected an interest rate cut within the year due to the crisis in the U.S. provincial bank, fell all at once at Chairman Powell's remarks. On this day, the New York Stock Exchange Dow Jones 30 Industrial Average finished trading at 32,030.11, down 1.63% from the battlefield. The S&P 500 index closed at 3936.97, down 1.65%, and the NASDAQ index closed at 11,669.96, down 1.60%.
