Rate Hike Served Dual Purpose

Amid growing concerns about U.S. financial system stability, the Federal Reserve (Fed) continued pursuing its inflation-fighting mandate. Policymakers raised interest rates another 0.25 percentage point on Wednesday, lifting the benchmark lending rate to a range of 4.75% to 5%. Short-term interest rates haven’t been this high since late 2007.

Recent bank failures led many Fed observers to question whether additional rate hikes were prudent. In our view, a quarter-point rate hike was appropriate for two reasons: It confirmed the central bank’s commitment to taming still-high inflation while signaling policymakers’ confidence in the U.S. financial system.

Just days before Silicon Valley Bank (SVB) and Signature Bank failed , Fed Chair Jerome Powell told Congress the pace of rate hikes might increase. He noted that recent stronger-than-expected economic data could prompt the Fed to lift rates higher than expected. Powell’s March 7 speech immediately led to market expectations for a half-point rate hike at today’s meeting and additional increases at future meetings.

In American Century’s view, not raising rates today would have sent the wrong message to financial markets. Quickly downshifting from an anticipated half-point rate hike to no increase could have amplified concerns about the U.S. financial system. It also could have damaged the Fed’s credibility if inflation becomes a bigger problem for the economy. Read more here.

Feel it’s time to review your long term planning and investing? Reach out to set up your free initial meeting.

Your weekly market update is here.