by Howard Schneider and Ann Saphir

WASHINGTON (Reuters) – The U.S. Federal Reserve (Fed) on Wednesday announced a quarter-point hike in its main interest rate and stressed that recent tensions in the banking sector could trigger a tightening of credit conditions, with “significant” repercussions on the economy.

Banks, whether they are victims of massive withdrawals or are worried about them, could become increasingly reluctant to provide loans, a risk that has prompted the Fed to revise its own expectations for monetary policy.

The recent banking stress is “likely to lead to tighter credit conditions for households and businesses and to weigh on economic activity, hiring and inflation”, can we read in the press release published at the outcome of the meeting of the monetary policy committee (FOMC).

“We will look to see (…) how serious the situation is and if it looks set to last,” Fed Chairman Jerome Powell said at a press conference. “It could easily have a significant macroeconomic effect and we would take that into account in our policies.”

The rate target for federal funds (“fed funds”), the main instrument of American monetary policy, has been raised to 4.75%-5.00%. This decision was taken unanimously.

New projections from the US central bank show that ten out of 18 FOMC members still expect rates to rise another quarter point by the end of the year.

Notable change, the press release no longer mentions that further rate hikes will be appropriate, whereas this had been the case since the beginning of the monetary tightening cycle, on March 16, 2022.

Instead, the committee says “further monetary policy tightening may be appropriate,” raising the possibility of just one more 25 basis point hike this year.

Jerome Powell assured that the money of savers in American banks was “safe”. He repeatedly expressed his confidence in the stability of the financial system, stressing that “the flow of deposits in the banking system (had) stabilized last week” and that the bankruptcy of Silicon Valley Bank testified to a “bad management” of its direction and not of general weaknesses in the sector.

He nevertheless indicated that this event had highlighted a failure of the supervision of the central bank which was the subject of a review to be completed on May 1st.

NO RATE CUT FORECAST IN 2023

At the end of this meeting, the Fed is probably closer to the end of its rate hike cycle.

“The Fed has been spooked by Silicon Valley Bank and other banking turmoil. They certainly see that as a potential factor in slowing inflation, which maybe helps them do their job without having to raise interest rates. aggressively,” said Tim Ghriskey, strategist at Ingalls & Snyder.

Jerome Powell, however, stressed that other increases could follow, if necessary, and that no decline was anticipated this year.

The Fed isn’t assuming the battle against inflation is over because while price increases have slowed, inflation “remains elevated,” he said.

In financial markets, the major Wall Street indices ended the session in the red, losing around 1.6%, while the dollar and US Treasury yields widened their losses, the ten-year falling below 3 .5% and the two-year below 4%.

New economic forecasts from the central bank show its members expecting an unemployment rate of 4.5% this year on average, against 4.6% expected in December, while the estimate for US growth has been revised from 0 .5% to 0.4%.

Inflation measured by the index favored by the Fed, that of personal consumption expenditure (PCE), should end the year at 3.3%, against 3.1% in the previous projections.

(Howard Schneider, with Noel Randewich in New York; Laetitia Volga, editing by Bertrand Boucey and Jean Terzian)

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