US Federal Reserve votes to increase interest rates to 16-year high

The US Federal Reserve voted to increase interest rates to a 16-year high on Wednesday, even as a banking crisis has left the economy wobbling.

The Fed chair, Jerome Powell, has consistently argued that the central bank must prioritize bringing down inflation, which hit a 40-year high in the wake of the Covid-19 pandemic.

Core inflation, which excludes the more volatile energy and food prices, went up slightly in March as housing prices rose 8.2% over the last year. Fed officials have probably been paying attention to that issue alongside signs that the jobs market remains robust. In March, 236,000 jobs were added to the labor market.

But there have been signs that the economy is starting to cool. Consumer spending has flattened and US manufacturing hit a nearly three-year low in March after years of growth coming out of the pandemic.

This is the fourth quarter-point hike, making it one of the smaller increases after the Fed ratcheted up four three-quarter-point hikes in a row in the summer and fall as interest rates hit 40-year highs.

Still, some had expected the Fed to pause its series of hikes at its last board meeting in March, which took place just two weeks after the collapse of Silicon Valley Bank (SVB). Though the Fed was looking at a half-point increase, it raised rates by a quarter point, which was seen as an acknowledgment that the banking crisis was also likely to affect the economy negatively.

This week First Republic became the latest mid-sized US bank to collapse after worried depositors withdrew $100bn in funds.