Economy

Fed decides to increase interest rates despite bank runs

The Federal Reserve addressed recent bank runs in making its decision to raise interest rates.

Fed decides to increase interest rates despite bank runs
AP
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The Federal Reserve concluded two days of meetings on Wednesday by deciding to increase interest rates .25%. 

While another interest rate hike was considered likely, recent rank runs have brought into question whether the Federal Reserve would continue raising interest rates. Federal Reserve Chair Jerome Powell has stated that the board’s goal is to get the annual rate of inflation down to 2%. 

The Federal Reserve addressed its decision in light of the recent bank runs.

"The U.S. banking system is sound and resilient. Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain. The Committee remains highly attentive to inflation risks," the Federal Reserve said in a statement. 

According to the Bureau of Labor Statistics, the rate of inflation was at 6% as of February, which is down from a peak of 9.1% last summer. 

Since last year, the Fed has increased the Federal Funds rate from 0.75%–1% to 1.5%–1.75%. After a series of interest rate increases, the rate now stands at 4.75%–5%, its highest mark in 15 years. 

Treasury Secretary Yellen expresses confidence in banking industry
Treasury Secretary Yellen expresses confidence in banking industry

Treasury Secretary Yellen expresses confidence in banking industry

Yellen reassured banking leaders, saying the Fed will continue to provide access to liquidity when it is needed.

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"Over the past year, we have taken forceful actions to tighten the stance of monetary policy," Powell said days before Silicon Valley Bank collapsed. "We have covered a lot of ground, and the full effects of our tightening so far are yet to be felt. Even so, we have more work to do." 

There were mixed opinions among economists on whether a rate hike is appropriate. Larry Summers, the treasury secretary under President Bill Clinton, said he believes a .25% increase would be appropriate. 

Meanwhile, former Labor Secretary Robert Reich said in an op-ed for The Guardian that rate hikes should be paused to prevent additional bank runs.

The high federal interest rates have a profound impact on borrowers trying to buy a home. According to federal data, the 30-year fixed mortgage rate has more than doubled in the last year to 6.6%.