Federal Reserve raises interest rates 0.25%, intensifying inflation fight despite banking fears

The twin economic challenges posed a dilemma for the central bank.

ByMax Zahn ABCNews logo
Wednesday, March 22, 2023
Fed raises interest rates 0.25%, intensifying inflation fight
The Federal Reserve could raise interest rates as the U.S. economy weathers two pressing challenges: a banking crisis and persistent inflation.

WASHINGTON -- The Federal Reserve on Wednesday raised its short-term borrowing rate another 0.25%, intensifying the central bank's fight against inflation despite concern that previous rate increases helped trigger the nation's banking crisis.

The Fed's benchmark interest rate has contributed to the financial emergency facing U.S. banks.

Inflation has fallen significantly from a summer peak, though it remains more than triple the Fed's target of 2%.

The rapid rise in interest rates, however, tanked the value of bonds held by Silicon Valley Bank, precipitating its failure and cascading damage for the financial sector.

Nearly 190 banks are at risk of collapse amid high interest rates and declining asset values, according to a study released by a team of university researchers earlier this month.

MORE: Biden calls for tougher penalties for execs of failed banks

Biden wants the Federal Deposit Insurance Corporation to be able to force the return of compensation paid to executives at a broader range of banks should they fail, and to lower the threshold for the regulator to impose fines and bar executives from working at another bank.

A continuation of rate hikes risks further intensifying the banking crisis, putting additional financial institutions at risk of collapse. However, a pause on rate increases could undermine the Federal Reserve's fight against inflation, allowing high prices to persist and eat away at household budgets, economists previously told ABC News.

A survey by Bloomberg last week found that most economists expect the Fed to raise interest rates by 0.25% on Wednesday, matching the increase that the central bank imposed at its most recent meeting last month.

Over the last year, the Federal Reserve raised its benchmark interest rate by 4.5%, the fastest pace since the 1980s.

Over the last year, the Federal Reserve raised its benchmark interest rate by 4.5%, the fastest pace since the 1980s.

The Fed has put forward a string of borrowing cost increases as it tries to slash price hikes by slowing the economy and choking off demand. The approach, however, risks tipping the U.S. economy into a recession and putting millions out of work.

Persistent rate hikes also threaten the stability of the banking system.

Still, the Fed could avoid facing a choice between slowing price increases and preserving financial stability, since tighter lending practices taken up by private sector banks in response to the financial distress may cool the economy on its own accord, allowing the Fed to forego raising rates while still bringing down inflation.

"No matter what the Fed does later this month, financial conditions are tightening," Julia Pollak, chief economist at Zip Recruiter, said last week.