Washington [US], May 4 : The recent banking crisis in the US appears to have resulted in tighter credit conditions and they are likely to hurt economic activities, said US Federal Reserve Chair Jerome Powell after the two-day monetary policy review meeting where it once again hiked interest rates in their pursuit of managing inflation.
The US monetary policy committee, seeking to achieve inflation at the rate of 2 per cent over the longer run, hiked the key interest rate by another 25 basis points to 5.0-5.25 per cent.
The latest hike was the same size as its previous rate increase in the March meeting and marked the tenth straight rate hike.
Powell said in a press conference that credit conditions had already been tightening over the past year in response to the US monetary policy actions and a softer economic outlook.
"But the strains that emerged in the banking sector in early March appear to be resulting in even tighter credit conditions for households and businesses. In turn, these tighter credit conditions are likely to weigh on economic activity, hiring, and inflation," Powell said, adding that the extent of these effects remains uncertain.
One of the most prominent lenders in the world of technology startups, Silicon Valley Bank, which was struggling, first collapsed on March 10, after a run on the bank by the depositors. Its closure led to a contagion effect and the subsequent shutting down of other banks, including Signature Bank and First Republic Bank.
The collapse of a few regional banks in the US, which started with Silicon Valley Bank, has sent ripples across the global banking industry and posed fears of a contagion effect across economies.
Going ahead, the US central bank will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments for any further actions.
"We remain committed to bringing inflation back down to our 2 per cent goal and to keep longer-term inflation expectations well anchored. Reducing inflation is likely to require a period of below-trend growth and some softening of labour market conditions. Restoring price stability is essential to set the stage for achieving maximum employment and stable prices over the longer run."
Meanwhile, consumer inflation in the US moderated in March to 5.0 per cent from 6.0 per cent the previous month, but the numbers are still way above the 2 per cent target. It was at 6.4 per cent in January, and 6.5 per cent the month before.
The US central bank's current policy rate, which is now in a target range of 5.0-5.25, is the highest in several years, and notably, it was near zero in the early part of 2022.
Raising interest rates typically help in cooling demand in the economy and thus helps in managing inflation.
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