As Predicted, US Federal Reserve Increases Rates by 25 BPS

As widely predicted by market followers, the US Federal Reserve increased benchmark rates by 25 basis points.

Not too long ago, prognosticators were vacillating on whether the March meeting would increase rates by 50 bps or 25 bps. The recent bank crises caused the financial chattering classes to rethink the calculus, with the majority predicting a 25 bps raise and many publicly stating the Fed should hit the pause button as the US banking system has still not regained its sea legs.

The Federal Open Market Committee (FOMC) said in its statement that in support of its goals, it decide to increase the federal funds rate:

“The Committee will closely monitor incoming information and assess the implications for monetary policy. The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the extent of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective.”

The vote by FOMC members was in unanimous support of the policy decision.

Markets gyrated broadly during the day as Fedspeak word-parsers sought to glean additional insight into future actions. In the end, there was little there.

It is clear that if prices remain elevated and unemployment low, the Fed will push rates higher. If things change, so will the Fed. The one glimmer of insight was the acknowledgment that the banking crisis could limit credit availability, in brief, doing some of the Fed’s work.

During the Q&A session of the announcement, Fed Chair Jerome Powell commented on the review of how supervisors handled the bank failures welcoming an independent review of the debacle. He said they will figure out why things moved so dramatically and so quickly and supply recommendations.

Asked about the fact that the Biden administration has been fighting the Fed with its fiscal policy, which has flooded the market with trillions in stimulus, Powell said this drove inflation initially but is not currently the problem. He noted they have no control over fiscal policy.

Rohit Arora, CEO of Biz2Credit – an online lender serving SMEs, shared his thoughts on the Fed’s actions:

“By raising interest rates again, the Fed is telling us that they are still very worried about inflation and will continue to take measures to get the economy back to the long-stated 2% inflationary goal. While raising interest rates is a historically successful tactic used to combat high inflation, the rising cost of capital is putting a squeeze on small business owners. Often, small business loans are variable rate loans, and continuously rising rates are increasing the amount of their revenues that go towards debt service. Many small businesses are already experiencing cash flow issues.”

Arora said the resulting credit crunch for small businesses due to the reluctance of banks to make loans means companies will be looking at non-bank, or Fintech lenders, to access capital.



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