Tipsheet

Federal Reserve Hikes Interest Rates Amid Banking Turmoil

Spencer Brown
Spencer Brown  |  March 22, 2023 2:30 PM

In the wake of the biggest bank failure since the 2008 financial crisis and amid continuing inflation, the Federal Reserve's Federal Open Market Committee (FOMC) met this week and announced on Wednesday that interest rates would be increased an additional 0.25 percent to a full 5.00 percent.

Interest rates have already been raised by the Fed to their highest levels in decades, yet inflation has remained stubbornly high after surging to levels not seen in 40 years as a result of President Biden's tax-and-spend policies. 

The FOMC statement announcing yet another consecutive rate hike noted that inflation "remains elevated" and said that "recent developments" in the economy are "likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation" while admitting that the "extent of these effects is uncertain."

Before the failures of Silicon Valley Bank and Signature Bank, Federal Reserve Chairman Jerome Powell told lawmakers that he expected interest rate hikes to continue and go higher and faster than previously estimated in order to try wrangling inflation down to the Fed's goal of just two percent. 

But then when regional banks started failing, that gave the Fed pause due to the already high interest rate environment that led to their failures. Rep. Thomas Massie (R-KY) had a great explainer on just how the Fed's manipulations contributed to SVB's collapse, though Chairman Powell and the Federal Reserve are unlikely to publicly agree with his conclusions.

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Wednesday's interest rate decision also follows Moody's announcement that it had downgraded its outlook for the U.S. banking system from "stable" to "negative," and the FOMC's statement reiterated claims from Biden administration officials that America's "banking system is sound and resilient."

Despite recent trepidation regarding banks, the Fed's decision to continue raising interest rates was unanimous among the FOMC's members — suggesting that the threat of continued inflation weighs heavier on the minds deciding U.S. monetary policy than the risk of more regional or larger bank failures. 

Still, interest rate hikes have — thus far — failed to bring inflation down to the Fed's goal of two percent. At the beginning of 2023, the Consumer and Producer Price Indexes showed inflation reversing dips recorded at the end of 2022 and accelerating upward. 

Will the Fed's ninth consecutive interest rate hike announced Wednesday be the one that drags inflation down? It seems unlikely, based on comments from the Fed's Jerome Powell earlier this month before Congress, but he's admitted that the Fed has previously backed off interest rate hikes prematurely and is likely hoping to avoid making the same mistake — if the Fed hasn't already.

House Ways and Means Committee Chairman Jason Smith (R-MO) reacted to the Fed's latest interest rate hike in a statement:

Families are continuing to feel the consequences of the Democrats' inflation crisis. Higher interest rates means more Americans unable to buy a home, small businesses that can’t get a line of credit, and families buried in credit card debt they’ve taken on just to get through these last two years. The one-two punch of inflation and interest rate increases is taking its toll on working Americans around the country. The Ways and Means Committee has heard directly from folks in West Virginia and Oklahoma about how it’s harder to pay the bills and budget for the future in Biden’s economy.

Recent news about the banking system has also brought back terrible memories for many Americans concerned about what will be the next crisis to emerge in the wake of the Democrats’ reckless spending. The last time America experienced the same combination of interest rate hikes and bank bailouts was right before the worst recession that most Americans remember. President Biden’s failed policies are forcing Americans to relive the nightmares of the Obama-Biden era, when families lost their homes, businesses shuttered, and workers lost their jobs. That is why Republicans are working every day to rein in reckless spending, expand economic opportunity, and hold the Biden Administration accountable.

Editor's Note: This story was updated to include reaction from Rep. Jason Smith.