WASHINGTON ― The Federal Reserve on Wednesday continued to ramp up its efforts to slow the economy, despite recent bank failures caused partly by rising interest rates.
The central bank announced it is raising interest rates by another quarter of a percentage point, the ninth rate hike since the Fed kicked off its battle against inflation in March 2022.
Mark Zandi, chief economist of Moody’s Analytics, a financial analysis firm, said that continuing to hike interest rates runs contrary to the government’s recent efforts to stabilize banks.
“The Fed’s decision to raise rates is incongruous with efforts to re-establish the stability of the financial system,” Zandi told HuffPost in an email. “It shows a willingness to roll the dice with the financial system and economy to get inflation down more quickly.”
“The last few weeks of financial turmoil have shown that interest rate hikes are wreaking havoc on our financial system. Adding more fuel to the fire will only exacerbate the instability that is of the Fed’s own making.”
– Rakeen Mabud, chief economist with Groundwork Collaborative
Higher interest rates make money more expensive to borrow, causing people to spend less. The Fed is hoping the economy will cool off just enough that businesses set lower prices for goods and services.
But another potential consequence of higher rates is financial instability ― not to mention potentially massive layoffs.
Overall annual inflation has fallen from its peak of 9.1% last summer to 6% in February, but the recent pace of decline has been too slow for the Fed’s liking.
The Fed’s strategy has been controversial from the start, with progressives calling on the central bank to lay off the rate hikes so as to avoid causing a recession. After all, the higher prices resulted partly from supply chain problems ― such as factories shutting down in China because of COVID ― that are entirely outside the Fed’s control.
But the recent failure of Silicon Valley Bank in California illustrated another way that interest rates can cause economic turmoil ― by making investors complacent about the risk of interest rates rising after a long period of cheap money.
Silicon Valley Bank invested depositors’ money in low-yield government bonds that lost value when interest rates rose last year. When panicky depositors started withdrawing their money last month, the bank couldn’t pay them. (BuzzFeed, HuffPost’s parent company, banked with SVB.)
“Today’s rate hike is a reckless move by Chair [Jerome] Powell and the Fed,” Rakeen Mabud, chief economist with Groundwork Collaborative, a group of progressive economic experts, said Wednesday. “Chair Powell knows that his aggressive rate-hiking campaign has the potential to cause mass unemployment and economic devastation for millions across the country.”
“The last few weeks of financial turmoil have shown that interest rate hikes are wreaking havoc on our financial system,” she said. “Adding more fuel to the fire will only exacerbate the instability that is of the Fed’s own making.”
In addition to overseeing the money supply, one of the Fed’s jobs is supervising banks ― which it seemingly failed to do in Silicon Valley Bank’s case, after Congress passed a law in 2018 telling regulators to go easy on regional financial institutions.
The Federal Reserve, the U.S. Treasury Department and the Federal Deposit Insurance Corporation swooped in to guarantee deposits at SVB and to make loans available to other regional banks with antsy depositors. Some Republican lawmakers decried the moves as a “bailout,” but officials insisted they had to make depositors whole in order to prevent a broader financial crisis.