US Federal Reserve delivers a 25 basis point hike amid banking turmoil

The Federal Reserve hiked interest rates by 25 basis points on Wednesday. During the Federal Open Market Committee (FOMC) meeting, the Fed also hinted at pausing further hikes following the recent turmoil in the US financial industry after the collapse of Silicon Valley Bank and Signature Bank.

Federal Reserve hikes interest rates

Fed Chair Jerome Powell is trying to restore confidence in the US banking sector. Powell said that SVB’s collapse was caused by mismanagement, adding that its collapse did not signal weaknesses across the banking sector. The FOMC’s statement also noted that the US banking sector was “sound and resilient.”

Nevertheless, Powell’s assurances did not do much to calm the markets. Wall Street traded lower after the slight hike. The Fed Chair also addressed a news conference saying that the Fed was still committed to lowering inflation while assessing whether the recent bank failures had affected lending and demand.

In the past year, the Fed has hiked rates eight times. However, the institution is currently facing a dilemma of fighting inflation while guaranteeing the banking system’s stability. The Fed also appears to have shifted its sentiments around interest rates, and more rates might not be on the way.

Meltdown in US banks

Earlier this month, two of the largest banks in the US were shut down by regulators. Silicon Valley Bank and Signature Bank were taken over by the Federal Deposit Insurance Corporation, with US regulators assuring depositors that they would receive their funds. UBS Group also acquired Credit Suisse over the weekend, easing market fears.

The aggressive interest rate hikes by the Fed were attributed to the meltdown in the banking sector, which was ranked as the worst since the 2008 financial crisis. Therefore, the market is optimistic that more interest rate hikes might not be on the way.

The CEO of Citigroup, Jane Fraser, recently said that he was confident about the state of US banks, adding that the recent events did not constitute a credit crisis. She noted that the situation was caused by a few banks with problems.

While most market fears have been alleviated, some banks are still feeling the pinch. The shares of First Republic Bank closed 15% lower on Wednesday despite some of the largest banks in the US giving it $30 billion support.

Pacific Western Bank, one of the largest regional lenders, also announced it secured $.4 billion from the Atlas SP Partners investment company. The bank’s stock dropped by 17% on Wednesday despite efforts to reassure investors that it had a strong cash position.

Despite the ongoing turmoil, regulators have reassured investors that the ongoing turmoil was different from the crisis witnessed in 2008. The events with SVB and Signature Bank triggered the crisis at Credit Suisse, which prompted a takeover by UBS Group. Credit Suisse, once one of the largest banks globally, was acquired by UBS for 3 billion Swiss francs.