US Fed, Despite SVB Crisis, Says "Will Control Inflation"... Raises Interest Rate by 0.25%P

The U.S. central bank, the Federal Reserve (Fed), recently implemented a so-called 'baby step' by raising the benchmark interest rate by 0.25 percentage points despite concerns over a banking system crisis heightened by the collapse of Silicon Valley Bank (SVB). This marks the ninth consecutive rate hike since the Fed declared a 'war on inflation' and began its rate hike cycle in March last year. The interest rate differential with South Korea has widened to 1.5 percentage points.

[Image source=Reuters Yonhap News]

On the 22nd (local time), following the March Federal Open Market Committee (FOMC) regular meeting, the Fed announced in a statement that it would raise the federal funds rate from the previous 4.5?4.75% range to 4.75?5%, an increase of 0.25 percentage points. This is the highest level since 2007. While the Fed's rapid tightening has been cited as a background factor for the recent SVB-related banking risks, and there were even expectations of a rate freeze, the Fed chose to maintain its tightening stance to curb inflation.

Fed Chair Jerome Powell said at a press conference immediately after the FOMC meeting, "We considered pausing rate hikes ahead of the meeting," but added, "Data on inflation and the labor market were stronger than expected, so we judged it appropriate to continue raising rates." He explained that "before the banking issues emerged, I was thinking about whether we needed to raise rates further," but emphasized the need to maintain public confidence in achieving the 2% inflation target. This baby step was decided unanimously by the FOMC members.

The policy path, as indicated by the dot plot, remains unchanged, with rates expected to rise to 5.1% (median) by the end of this year. This is the same level as the December FOMC dot plot last year. Essentially, it signals that the cycle could end after this single rate hike. In the March FOMC policy statement, the phrase 'ongoing increase' in rates was removed, and instead, the phrase 'additional policy firming' was added, reinforcing this outlook.

However, Chair Powell dismissed the possibility of rate cuts this year. He stated, "If the market expects rate cuts, that is completely wrong," and drew a clear line by saying, "We are not considering rate cuts."

He also reaffirmed the Fed's commitment to use "all available tools" to mitigate the economic fallout from the SVB incident. Powell, who mentioned banking risks at the start of the press conference, emphasized that "the SVB failure is an isolated case" and "not a risk across the entire U.S. banking system." However, he warned of potential spread, saying, "It will tighten credit conditions for households and businesses and lead to economic repercussions," and that the Fed is "monitoring potential credit tightening." He added, "It is too early to know the full extent of these effects," and made it clear that policy responses will be taken as needed depending on the situation.

With the Fed's baby step on this day, the interest rate gap with South Korea widened from 1.25 percentage points to 1.5 percentage points. As a result, the rate differential between the U.S. and South Korea reached its largest gap in over 22 years since May?October 2000 (1.5 percentage points). Concerns over foreign capital outflows and the depreciation of the Korean won are expected to increase pressure on the Bank of Korea to raise rates.

The New York stock market closed lower across the board. Following Chair Powell's dismissal of the possibility of rate cuts within the year, U.S. Treasury Secretary Janet Yellen dampened market sentiment by stating that comprehensive insurance protecting all bank deposits is not being considered. The S&P 500 index, led by large-cap stocks, fell 1.65% from the previous session, while the tech-heavy Nasdaq index dropped 1.60%.