Federal Reserve Pledges Not to Cut Interest Rate in 2023

The Federal Reserve pledged not cut the US interest rate this year but noted that it almost paused the latest rate hike earlier on Wednesday due to the banking crisis in the United States.

“The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run,” the Fed said on Wednesday, referring to its Federal Open Market Committee (FOMC) that increased the interest rate by 25 basis points.

The Fed has added 450 basis points to the interest rate over the past year to bring under control inflation that hit four-decade highs of more than 9% per year in the aftermath of the coronavirus pandemic. The US central bank has said its aim is to bring inflation back to the long-standing target of 2%.

“In support of these goals, the Committee decided to raise the target range for the federal funds rate to 4-3/4 to 5 percent,” the Fed said. It added that it expected “additional policy firming” as appropriate to achieve its goal of lowering inflation to 2%.

Fed Chairman Jerome Powell, appearing at a news conference after the FOMC’s decision, pledged no interest rate cuts until the end of 2023.

“Participants don’t see rate cuts this year,” Powell said, referring to the Fed policymakers. “They just don’t. As always, the path of the economy is uncertain.”

Powell said Fed policy often reflected what it anticipated in its monthly Summary of Economic Projections, where it predicted real GDP growth of 0.4% this year and 1.2% in 2024, versus the 2.1% growth in 2022. The median projection for inflation is 3.3% for this year, 2.5% in 2024 and 2.1% in 2025.

While the Fed was resolute in the fight against inflation, it almost did not have a March interest rate hike due to worries about the US banking sector, Powell said.

“The events of the last two weeks [gave rise to thinking that there could be] some tightening of credit conditions for households and businesses … [that] would work in the same direction as rate tightening. In principle, as a matter of fact, you can think of it as being the equivalent of a rate hike, or perhaps more than that,” Powell said.

However, after two days of deliberations, policy-makers decided that monetary conditions were still loose and that a rate hike was warranted, Powell said.

“[Thus] our decision was to move ahead with the 25-basis point hike,” Powell added.

The United States has been enveloped in a banking crisis that began with a federal takeover of two commercial banks, Silicon Valley and Signature. Since, the banking industry rallied to bail out a third bank called First Republic.

A fourth bank, PacWest Bancorp, was reported to be in trouble on Wednesday after a 20% run on its customer deposits, requiring a cash infusion of $1.4 billion to keep it afloat.

All the institutions faced rapid and massive withdrawals of deposits by customers fearing the safety of their money.

A study by a group of private economists has concluded that some 186 US banks may have troubled finances that have not been reported, suggesting the banking crisis may be bigger than thought.

The crisis also took on an international dimension after renowned Swiss investment banking Credit Suisse went under last week and had to be bought by rival UBS.