- YOMIURI EDITORIAL
- U.S. Rate Hikes Continue
Fed Should Scrutinize Negative Impact of Bank Failures
16:17 JST, May 6, 2023
What kind of impact will the continuation of interest rate hikes have on the lingering financial turmoil and the U.S. economy? The Federal Reserve Board should carefully assess the situation and manage its policies going forward.
The Fed has raised its benchmark interest rate by 0.25 percentage point to the 5-5.25% range, marking the 10th consecutive rate hike since the central bank lifted its zero rate policy in March 2022. The benchmark rate is now at its highest level in about 16 years since 2007.
Two U.S. banks, including the midsize lender Silicon Valley Bank, failed in March, and on May 1, First Republic Bank also collapsed.
Regarding the decision to continue raising interest rates amid persistent concerns about financial instability, Fed Chair Jerome Powell said at a press conference, “Inflation pressures continue to run high and the process of getting inflation back down to 2% has a long way to go.”
Low-income earners, in particular, are among those who take a hit from inflation. It is important to stave off price increases.
The U.S. consumer price index in March rose 5% from a year earlier, exceeding the Fed’s target of 2%, even though the rate of increase declined for the ninth consecutive month. Wage increases due to labor shortages are pushing up prices for services.
U.S. real gross domestic product grew at an annualized rate of 1.1% in the first three months of this year from the previous quarter, posting growth for the third consecutive quarter. Consumer spending grew significantly.
The robust U.S. economy may also have been a supporting factor behind the Fed’s decision to raise interest rates.
However, it remains to be seen whether the financial turmoil will subside.
The Fed’s rate hikes have caused the prices of government bonds and other assets held by banks to fall, worsening the banks’ financial situation. Banks could tighten their lending criteria, making them increasingly reluctant to lend. If the flow of money to businesses and households stagnates, the situation could result in an economic slowdown.
Tighter lending by banks is said to have a similar cooling effect on the economy as central bank interest rate hikes. The Fed must closely examine the impact of financial instability on the real economy.
There is a view that the U.S. economy will face a downturn toward the second half of the year as a result of the rapid interest rate rises. The focus will now be on when the Fed will stop raising rates.
The latest Fed statement changed the language regarding the need for additional rate increases in the future direction of monetary policy, indicating a possible pause in June when policymakers next meet.
The Fed’s policy change will greatly impact global financial markets. It is hoped that the Fed will carefully disseminate information on its policy direction while examining economic and price movements.
(From The Yomiuri Shimbun, May 6, 2023)
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