The FED Hikes Interest Rate by 25 BPS Amid Banking Turmoil

On Wednesday, May 3rd, following the latest Federal Open Market Committee, the FED announced another interest rate hike. The latest increase—the 10th in a row—is bringing rates up by 25 basis points, up to the 5-5.25% range. The move is widely expected to be the last this year and will likely be succeeded by a prolonged period of higher interest rates.

May FOMC Meeting Brings 10th Rate Hike

This Wednesday, the FED announced another interest rate hike of 25 basis points. The latest move marks the 10th time in a row that the FOMC meeting has brought a rate hike and brings the target range up to 5-5.25%. While the increase is in line with most analysts’ expectations it is somewhat controversial as recent months have seen rising fears of a recession, and a group of US lawmakers urged Chair Powell to halt hikes this Tuesday.

The Federal Reserve has been increasing interest rates for over a year starting in March 2022. The aggressive approach is the result of worrying high inflations and, despite it declining significantly since the high of 9.1% last Summer, Chair Jerome Powell has repeatedly stated that the FED will remain steadfast until the target rate of 2% is achieved.

The latest FOMC has been particularly in focus as the latest CPI report demonstrates a continuous reduction in the inflation rate, but, perhaps more importantly, due to the worrying crisis that has developed in the banking sector since early March. Despite the fears, rates are likely to remain high for some time as Chair Powell disclosed as much to a group of Russian pranksters in January after he was tricked into believing he was on a call with Ukraine’s President Zelensky.

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How Rate Hikes Helped Develop the Bank Crisis

One of the consequences of the aggressive rate hikes that even saw four consecutive 75 BPS increases last year was the transformation of numerous US banks into what has widely been named “zombie banks”. Essentially, the rate increases have devalued some otherwise low-risk assets held by the lenders rendering them effectively insolvent. 

While this technical insolvency would otherwise not be a problem, the fears surrounding the banking sector sparked by the FTX-caused liquidation of the Silvergate Bank, and a poorly-timed capital-raising attempt by Silicon Valley Bank just days before its closing triggered a crisis of confidence that forced the banks to turn their unrealized losses into realized losses and drove them out of business.

At the time of writing, four American banks have been forced to close their doors with First Republic being the latest to have been driven into government receivership before being sold to JP Morgan. Cryptocurrencies have, however, somewhat unexpectedly benefited from the collapse and major digital assets like Bitcoin have rallied significantly in the wake of the bank closings. 

Editorial note (May 4th, 2023, 05:35 PM EST): The headline was changed for clarity.

Do you think this is the last rate hike of 2023? Let us know in the comments below.